April 29th, 2013
Over the past 12 months, a substantial market shift towards fixed rate mortgages has picked up, with variable rate options gradually losing their previous attraction. Several factors have added to this movement in activity: the introduction of the Funding for Lending scheme has allowed lenders to vastly reduce the levels they offer to secure mortgage finance. In addition, industry-wide calls to further reduce the base rate have all but dried up since the turn of the year, seemingly leaving one direction for tracker rates to go when the base rate next moves.
Most galling for some borrowers already on a tracker style loan is the emerging news that some lenders are utilising clauses within their terms of business to raise variable rates without the Bank of England first increasing the base rate. Bank of Ireland has recently hit the news by appearing to renege on their existing terms, by raising existing tracker borrower’s rate margins. The bank is citing a clause tucked well within the contractual small print that states they can increase the margin of a base rate tracker after five years have passed from the point of inception. For roughly 13,500 Bank of Ireland customers, this will mean a monthly increase in repayments of £500.
Bank of Ireland are not alone in producing such clauses, with Manchester Building Society justifying imminent raises to some borrowers tracker mortgages, via little-known lending clauses that a mortgage taken on this basis before 2004 is open to an increase in specific circumstances. Many contractors holding mortgages on a tracker basis with Woolwich and Natwest should be aware that both lenders clearly state their tracker options will not directly follow the Bank of England base rate, and in fact follow an in-house version of the rate. This allows both lenders to raise the base rate on a whim, even if the Bank base rate has not increased.
All of these warnings lead to the question, is it worth taking the risk of a tracker? The argument for remains prominent for borrowers looking to retain an existing, low tracker deal when either moving or remortgaging for additional borrowing. If you can retain your current 1 per cent above Bank of England base rate tracker, and move to a bigger home, why would you give this up? Although this may seem to be the best choice, contractors should bear in mind that not every lender is contractor friendly, and the current lender may have assessed their current mortgage on older underwriting criteria. If personal and employment circumstances have changed, the lender may not allow the porting process to occur due to stricter criteria.
The main advantage of a variable rate choice tends to lay within the lack of early repayment charges for some of these loans. By extension, most options also come with unlimited overpayments, offering an ideal level of flexibility which has often been the choice for contractors on a historical basis. The chance to move to a fixed loan when rates do eventually rise may be worth the gamble, if it’s possible to keep an open door to making changes further on, without a penalty to do so.
A move to a 0 per cent Bank of England base rate should also not be ruled out. Paul Tucker, the deputy governor of the Bank of England, said in March that the Bank had again discussed the possibility in recent times. However, The Council of Mortgage Lenders was also quoted at time as noting that the change is “unlikely to be implemented any time soon.”
Putting aside the questions of further reductions, many industry experts are continuing to state that they feel the base rate will not climb for at least two years and the incumbent governor of the Bank of England, Paul Carney, has stated that the UK’s monetary policy is likely to be relaxed rather than becoming more restrictive in the future.
Although these positives could leave many sitting on the fence, there is an increasing argument for the majority of contractors to take up a fixed rate. Current contractor friendly best buy tables evidence that there is little difference in the margins for the best fixed or variable rates. For instance, contractor friendly lender Virgin Money currently offer two year fixed and tracker rates on a 75 per cent loan to value, at the same margin of 2.55 per cent.
There is a solid argument to be made that, as both rates have a two year tie in, and there is no guarantee that the base rate will decrease further, why not take the security of fixing? Because of the inherent uncertainty that prevails in the market, it is no surprise that a reported 80% of applications for mortgages across the market are currently being processed on fixed rates.
Lenders are so driven towards the fixed rate market at present, that these rates have repeatedly tumbled month on month since the last quarter of 2012. Currently, it is possible for a contractor looking to purchase or remortgage to secure five year fixed rates at levels as low as 2.89 per cent. These options become harder to argue against, especially if it is considered that the average interest rate over the past 5-10 years has been 4-4.5 per cent.
Ultimately, the final decision rests upon the individual, and one contractor’s plans will differ entirely to the next. But the good news is that with rates becoming more and more affordable, there has not been a better time to try and secure a more competitive deal for a mortgage, whatever choice of rate is taken.
Article by: Simon Butler, Senior Mortgage Consultant at Contractor Mortgages Made Easy
Media Contact: Raman Kaur, Public Relations Manager
Tel: 0844 44 88 80
Email: media@contractormortgagesuk.com