Surety of mortgage is often worth paying for

28 Apr 2011

This week’s publication of the minutes from the MPC meeting held earlier this month reveal a continuation of the split that has been apparent for the last couple of months. More members are now willing, it would seem, to countenance a rise in Base Rate however each month we appear to walk up to the decision door marked 0.25% rise only for an array of data to come flying out, effectively stopping us from walking through.

In April the data concerning the fall back in CPI to 4%, coupled together with the slight fall in unemployment figures, meant many economists were again revising their predictions for when the MPC would raise Base Rate. At the start of the year it seemed a sure thing that rates would rise in May, this then got pushed out to July, and the suggestion now seems to be that September is a much more likely bet. Having said this, there is plenty that could occur between now and then to ensure that all bets, with regard to Base Rate rises, are off.

Looking at Base Rate from a purely mortgage point of view, it’s difficult to tell what the industry would like to see. And our mood now may be completely different when the MPC eventually make that decision. Yes, it will probably come with an increase in remortgaging however what will it also herald in terms of arrears and repossessions?

Admittedly a 0.25% rise when it comes is unlikely to push many borrowers over the edge.  However, there is a danger that if rates rise consistently and quickly in a short space of time this could impact on those who are already having difficulties funding their mortgage. Of course many borrowers will take the opportunity to remortgage at this point however some – and we don’t truly know the numbers yet – will not be able to find a remortgage home and could be left on rising SVR products.

Many advisers operating in the mortgage sector may well welcome a rise in Base Rate, not least of all to boost remortgage activity, however to my mind most  would prefer to see a  drawn-out move to normal levels. Payment shock is a real possibility for some borrowers, even with relatively small increases in rates, and short and sharp increases are likely to impact much more. 

If this does happen we may have to see a further movement from lenders in terms of their ongoing treatment of borrowers in arrears and their forbearance policies. Already pressurised by the Government to pull back from repossession activity, using it only as a last resort, the need for this type of policy may well be increased, and that in turn does nothing to aid an already challenged lending community.

In terms of product choice now might be the time to suggest that the days when a variable rate was commonly deemed to be the most financially prudent and low-risk option for many are over. Clearly, when Base Rate does rise most borrowers will be thinking that fixes are the only game in town, which is why advisers may well be moving their clients in this direction already. 

Of course we are merely speculating  when it comes to when and how fast rates will rise  – and it may well be that short-term trackers will still work out cheaper – however how many borrowers will be willing to take the risk of uncertainty? 

One suspects that most will be happy paying more for a fixed in the sure knowledge that any substantial rate rise will not have an immediate effect on the amount of money they need to finance their mortgage each month. 

Whatever your view on these matters, clients will look to you as their professional adviser anticipating that your experience will guide them, and to a degree this is borne out given we have already seen a notable increase in the take-up of fixed rates since the start of the year; one suspects this will not change as we move through 2011.

In an economic climate of austerity cuts, significant public sector job losses and high inflation, surety of mortgage is often worth paying for.

Bob Hunt

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