Borrowers being pushed onto fixed rate mortgages
Mortgage borrowers are being pushed onto fixed rate products by the big banks despite another interest rate cut forecast in the coming months.
Over the past few weeks around 10 lenders, including seven of the top 10, have increased the interest rates on their tracker mortgage products by as much as 0.45%. This is despite two Bank of England interest rate cuts since December and forecasts of more ahead.
Halifax, Abbey and Nationwide are just three of 10 lenders that have increased rates on their tracker products.
Alex Murray, director of mortgages at IFA firm Thinc Group, said mortgage brokers are struggling to give advice because of a dearth of competitive tracker products.
He added: “Lenders are looking for profit at the moment, and fixed rates bring more money in. Many consumers don’t want to fix but they are being pushed onto these products by lenders.”
David Hollingworth, a mortgage specialist at brokerage London & Country, said that when interest rates are falling, opting for a tracker mortgage rate is an obvious choice.
But he added: “Lenders are having to pay more for funding and this is being reflected in the cost of mortgages. They are protecting their margins in light of current market difficulties."
Hollingworth said that while tracker products are getting more expensive, fixed rate products are coming down in price.
For example, Abbey is reducing the rate on its two-year fixed rate mortgage by 0.2%, bringing it to 5.39%. In contrast, its two-year tracker mortgage is currently 5.74% (0.49% above the Bank of England interest rate) and is set to increase in cost to 5.94% (0.69% above the Bank of England interest rate) on 22 February.
Nici Audhlam-Gardiner, head of mortgages at Abbey, said: “In the current market, certainty seems to be what a lot of people want, so we’re driving down the costs on our fixed rate deals.”
Hollingworth added: "Rate changes are happening all the time so borrowers are advised to act fast if they see the mortgage for them. It might not be there tomorrow."
Is another rate cut on the cards?
Despite many commentators predicting another Bank of England interest rate cut may be forthcoming in the next few months, hints from two economists on the Monetary Policy Committee (MPC) that votes on rates suggest this might not be a given.
Andrew Sentence, the former chief economist at British Airways, told delegates at a business seminar in Exeter that the rising cost of energy and food, and decline in sterling, are likely to push inflation up.
He added: “While the MPC cannot do much about the short-term impact of these movements in commodity and currency markets, our interest rate policy does need to take into account the need to ensure that they do not have a sustained impact on inflation in the medium term.”
And Kate Barker, the former chief economic adviser at the Confederation of British Industry, recently warned of “volatile” inflation ahead.
Hollingworth said: “Interest rate cuts are still up for debate. The US is chopping rates but who knows if the UK will do the same. A few weeks ago another cut was a given, but now things are looking less certain. Only time will tell.”
With a tracker mortgage, the interest you pay is an agreed percentage above the Bank of England’s base rate. As the base rate rises and falls, your tracker will track these changes, and so rise and fall accordingly. If your tracker mortgage is Bank of England base rate +1% and the base rate is 5.75%, you will be paying 6.75%. Tracker rates are lower than lender’s standard variable rate (SVR) and as they are simple products for lenders to design, they usually come with lower fees than other mortgage schemes.
Monetary Policy Committee
A committee designated by the Bank of England to regulate interest rates for the UK. The MPC attempts to keep the economy stable, and maintain the inflation target set by the government and aims to set rates with a view to keeping inflation at a certain level, and avoiding deflation. The MPC meets on the first Thursday of each month and discusses a variety of economics issues and constitutes nine members: the governor, the two deputy governors, the Bank’s chief economist, the executive director for markets and four external members appointed directly by the Chancellor.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Confederation of British Industry
The CBI promotes the interests of its members, some 200,000 British businesses, a figure that includes 80% of FTSE 100 companies and around 50% of FTSE 350 companies. Formed in 1965, it’s the lobbying organisation for UK business on national and international issues and seeks to influence the UK government to help businesses compete effectively.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.