Payment Shock!
The Bank of England launched its Funding for Lending (FLS) scheme on August 1st as it attempts a new initiative to get banks lending and to kick-start the property market.
In recent weeks, four major banks have launched new four or five-year fixed rate mortgage deals at under three per cent. HSBC were the first and were followed by NatWest, Santander and Nationwide.
These historically low rate mortgage products have been launched in part as a result of the FLS. However, there has been some concern that these deals are only available to homeowners with at least 40 per cent equity and that there are as yet few new, better mortgage products available for first-time buyers and homeowners with low levels of equity.
So, how does it work, what are the best deals available for homeowners and will the banks launch more competitive deals for first-time buyers and homeowners with low equity?
Funding for Lending
The scheme works by allowing banks and other financial institutions to borrow money at below market rates as long as they then lend that money to individuals and businesses.
Banks can borrow up to five per cent of their lending stock at just 0.25 per cent for four years as long as they increase their lending. If they do they can then access more of the funds at the lower borrowing rate.
The scheme will be monitored closely and the Bank of England says that banks that do not lend more will be penalised and have to pay 1.5 per cent interest on future borrowing.
The best fixed rate mortgage deals
At the moment the best new deals are on medium to long-term fixed rate mortgage products and not all of the new deals are as a result of the FLS.
Ben Thompson, MD of Legal & General Mortgage Club notes that “HSBC, for example, have said all along that they’re not currently planning to take advantage of the scheme.”
However, most of the sub three per cent four or five-year deals are as a result of an expectation of lower funding costs and lower rates. Swap rates and 3m Libor have both fallen by around a quarter of a percent since the Mansion House Banquet speeches from The Governor and The Chancellor and 3m Libor, currently 0.74%, is still falling.
HSBC
This has encouraged the cheaper products. HSBC started the ball rolling in mid-July by announcing it was launching a five-year fixed rate deal at just 2.99 per cent for borrowers with a 40 per cent deposit. The product comes with a £1,499 fee.
Santander
Santander followed this with a similar deal and fee, but their product is only available to existing current account customers.
NatWest
NatWest followed next with a 2.95 per cent rate for a five-year fixed rate deal for homeowners with a 40 per cent deposit. However, this product comes with an eye-watering fee of £2,495. However, this could still represent an excellent deal, especially if you are borrowing in excess of £100,000.
Nationwide
This week, Nationwide has launched an alternative by offering a slightly lower rate, 2.89 per cent, over four years which is only available to Flex account holders with a loan-to-value (LTV) ratio of 60 per cent.
An additional product to try to appeal to those with slightly less equity was announced before by Nationwide.
So, it is clear that there is excellent value in the four and five-year fixed rate mortgage market, but are the low wholesale borrowing costs and the FLS going to mean that the mortgage competition price war extends to shorter-term fixed rate deals, other mortgage products and deals for first-time buyers and borrowers with low levels of equity?
Hope for borrowers with less equity?
Ben Thompson from Legal & General believes it will take some time for the same level of competitiveness to filter down to other parts of the market. “The trend that we are seeing where everyone is fighting for the lowest risk customers will continue for quite some time,” he said.
For those needing higher LTVs there is merit in waiting until the market settles down, when we expect better value will be available. Ben Thompson thinks that eventually borrowers with less equity will begin to see cheaper mortgage deals. He said: “Reduced funding costs for the banks will help to reduce rates on all mortgage types eventually. However, for the moment, the fight will stay contained around medium to long term fixes.”
With the launch of these new rates it is already clear that the Funding for Lending Scheme is very quickly proving effective as far as the mortgage market is concerned.
So when is the right time to review your mortgage? It is never easy, but we welcome the opportunity to discuss with clients and potential clients, their personal circumstances, and to gather their thoughts about their finances in general.
Many borrowers assume they can wait until rates rise before taking action, but this is where the theory of payment shock comes into play!
Take the example of a £100,000 interest only mortgage, on a variable rate of 2.5%, with repayments of £208.33 pm.
Currently, you could achieve a 5 year fixed rate of 2.95%, with repayments of £245.83 pm – an increase of £37.50 pm.
When interest rates increase (and they surely will), if the best rate available has risen to 3.99%, for example, then the repayments would rise from £208.33 pm to £332.50 pm – an increase of £124.17 pm.
This payment shock will be a huge issue in the future and will cause families some real problems, so it might be better to move on to a slightly higher fixed rate now, to avoid a huge jump later?
If you would like to consider the possibility of remortgaging, please contact us now and we will be happy to talk you through your options.