Seven years after cutting the base rate to 0.5 per cent, the Bank of England is still keeping it unchanged. However, that doesn’t mean the mortgage market has stayed still. Rates keep changing and so do the mortgage products available.
The buy-to-let market will shrink, so lenders are looking at other ways to tempt buyers. With rates so low they need to do more than just reduce rates. Aaron Strutt, Trinity Financial.
The housing market has also changed, so lenders are jockeying for position in the sectors they think will make them the best profits. Aaron Strutt of Trinity Financial says changes to buy-to-let have helped owner-occupiers. “The buy-to-let market is going to shrink,” he says, “so lenders are looking at other ways of tempting buyers in and with mortgage rates this low, they need to do more than just reduce rates.”
High loan-to-value (LTV) loans have benefited, with LTVs increasing and rates tumbling. The Barclays Family Springboard mortgage offers a way into owner occupation for borrowers with no deposit, though as Aaron Strutt points out, “It isn’t really a 100 per cent LTV loan, it’s a 90 per cent loan on a full capital repayment basis” once the guarantors’ 10 per cent linked savings is taken into account. The benefit of using this product, rather than parents simply paying the money over to their children as a deposit, is that they get the money back after three years, and it’s held in a savings account, generating interest
Mortgages today are not for life. Borrowers taking a high LTV deal should make overpayments whenever they can to build equity. Rachel Springall, Moneyfacts.
Rachel Springall of Moneyfacts says there aren’t many comparable mortgages on the market; specialist lender Aldermore has a guarantor mortgage but needs a 25 per cent deposit, while Family Building Society has a Family Mortgage requiring five per cent. “There are many lenders still offering deals under the Help to Buy scheme,” she says, “but they do not work the same way as the Family Springboard Mortgage.”
More generally, LTV loans have blossomed. David Hollingworth at London & Country says, “The options for those with small deposits have improved over the last couple of years.” He believes Help to Buy was crucial, since by bringing more (and larger) lenders into this end of the market, it increased competition. “Lenders have now cut their margins on lending to borrowers with lower deposits,” he explains.
Even so, tiered lending structures mean that “every five per cent extra deposit can make a difference.” Hollingworth quotes, to give an idea how the structure works, a two year fix best buy at 95 per cent LTV that would carry an interest rate of 3.29 per cent; at 90 per cent, that falls to 1.99 per cent; and at 60 per cent LTV, a borrower would get a rate of just 1.16 per cent.
MORTGAGES ARE NOT FOR LIFE
Taking a highly priced loan may only cost borrowers for a couple of years, though. Rachel Springall points out that mortgages today are not for life, and suggests that borrowers taking a high LTV deal should make overpayments if they possibly can. “This way when they look at remortgaging down the line they will hopefully have more equity,” she says, “which means they will have more competitively priced deals to choose from at lower loan-to-values.”
Borrowers with less than sterling credit records could also benefit from greater competition among lenders. Aaron Strutt says there are now a number of options in “adverse or at least semi-adverse” markets. “If you’re actually in arrears, you’ll struggle,” he says, “but if you’ve cleared your arrears you’ll be okay.” He points to an offer from Precise for borrowers with a default in the last 36 months (but not in the last 24 months), though he notes that borrowers will need a 25 per cent deposit, and they’ll pay an extra 1.5 per cent interest. “The reversion rates are quite high as well,” he says.
Bridging loans have been a bright point in the market, with a 56 per cent rise in the first quarter of 2016, though they remain largely the preserve of specialist lenders. Aaron Strutt says, “At the moment bridging lenders are fighting each other to lend. That makes bridging loans really cheap.” Though still expensive compared to ordinary mortgages, bridging loan rates have been cut from over 1 per cent a month to 0.6 per cent. Breaking a chain is a typical reason for bridging, but such loans are increasingly being used for development finance, for instance, where an existing mortgage lender won’t give permission for infill development in the garden of a larger property, or where borrowers are waiting for planning permission to be granted. “They’ll often roll up the interest,” he says, “but they want to know that you’ll either sell up or have some other way to pay.”
Following the Mortgage Market Review, self-employed borrowers saw their choice of lenders fall. Now, they have more options, but need to be canny about approaching the right firm. Aaron Strutt says evidence requirements vary by lender – “Halifax and Kensington only look for one year’s accounts; most other lenders want two.”
People are choosing fixed rates, even taking a ten-year fix. There is a lot of uncertainty in the market but borrowers can do something about that. David Hollingworth, London & Country.
According to David Hollingworth, that’s not the only difference. Contractors will find that some lenders now will look at the value of a long term contract, rather than looking at the accounts, while other selfemployed borrowers can benefit where lenders are prepared to look at retained profits, rather than dividends and salary, to calculate affordability. That can be a big help where small business owners have kept profits in the business to fund investment. “Tailoring the lender’s approach to the individual’s circumstances is as much part of the broker’s job as getting the right rate,” Hollingworth says.
There is one bit of bad news, though. NatWest has pulled out of the expat market, in which it was a major lender and offered the best deals. Borrowers working abroad will have a harder job buying in the UK from now on.
In the overall market, the Mortgage Market Review has now bedded in, and stable base rates mean that interest rates on loans are mainly affected by competition. David Hollingworth says “More players are jockeying for position and fighting to lead the market,” and that’s led to lower rates.
Fixed rates are particularly low, and more than 90 per cent of borrowers are now taking a fix, since with rates unlikely to fall further, there’s little benefit in taking a variable rate. Fixes are getting longer; Hollingworth says “more people are going for a five-year fixed rate, and some are even going for a ten-year fix. Although there is a lot of uncertainty in the market, you can do something about that as a borrower.”
HSBC offers a five-year fix at 1.99 per cent, while ten year fixes from Leeds or TSB are available at 2.89 per cent. However, repayment charges can be substantial.
Aaron Strutt admits he’s been wrong before; “We’ve been saying for a while now that five year fixed aren’t going to get any cheaper … and they’ve got cheaper.” Even so, he thinks fixes now represent good value for money.
We speak to all the lenders about their plans and all bar a couple say they are aiming to increase lending, typically by 10 per cent a year over the next five years.
Some of the best rates, though, come with high fees attached. While a good rate with a big fee can make sense for a borrower with a large mortgage taking a longer term fix, those with smaller mortgages or small deposits could see fees take a big bite out of their funds if they’re not careful. The good news is that lenders have generally created a range of products going all the way from a market leading interest rate with a big fee, to a higher rate with no fee at all. David Hollingworth warns that makes it more important than ever to tailor mortgage advice to the borrower’s circumstances.
Additionally, he warns, borrowers need to look at the reversion rate. “SVRs can vary substantially between lenders,” he says; “a lot of the big ones are around the 4 per cent mark but the highest is over 6 per cent”.
There’s one cloud on the horizon; the government’s Help to Buy scheme is due to close at the end of the year. However, while David Hollingworth says it was an important catalyst for the market, he believes it’s no longer necessary. Santander is still offering 95 per cent loans, he says, but no longer relies on the government guarantee. He believes the scheme has done its work and can now be phased out without affecting the market.
Aaron Strutt, too, believes lenders are no longer reliant on Help to Buy. “We speak to all the lenders regularly about their plans,” he says, “and all bar a couple have said they aim to increase their lending, typically by 10 per cent a year over the next five years.”
The market has certainly become more complex as lenders have sought not only to differentiate their products and capture the top of the Best Buy tables, but also to create a range flexible enough to direct lenders of differing credit quality to correctly priced loans. The difference between the best and worst loans can be wide, Aaron Strutt says, and “It’s not just rates or fees that differ; lenders have different income multipliers and different loan criteria for each band.”
Shopping around is more important than ever in this environment. That takes time – David Hollingworth advises borrowers to start looking around three months before their fixed rate expires to make sure they get the right deal and aren’t just “dazzled by low rates”.
But the good news is that while shopping for the right deal is more difficult, those deals are there for the taking. Lenders are not just open for business – they are keen to lend.