Market Watch

Do you believe that the popularity of fixed-rate deals will continue to fall? How will the increase in Bank base rate (BBR) affect the take-up of fixed-rate deals?

Name: Andrew Montlake
Company: Coreco Group 

The popularity of fixed-rate products has waned as people come to terms with the financial environment. The “as cheap as possible please” line has been quoted more than usual as many clients expect that BBR will stay low.

However, it is easy to become blasé about this status quo and get sucked into the ‘cheapest is best’ vacuum. The reality is rates are going to rise and margins on trackers are higher than ever. The conversation with those clients should be whether they can afford a 2% or 3% rise over the next few years.

As we get closer to the time that it looks like rates will finally rise again, we will see a growth in the take-up of fixed-rate products. It all depends on your point of view on interest rates, but I worry that more fixed-rate deals should actually be being taken now, especially by those who have been enjoying a prolonged ‘holiday’ on a low variable rate.

The good news is that fixed-rate products are becoming more attractive as competition is returning to the market, so the difference between a tracker and the security of a fixed-rate deal is becoming more blurred.

Once that first change in BBR occurs, there will be a panic rush to the sanctuary of a fixed-rate deal, but as ever, it all comes down to obtaining sensible advice.

It is not all about whether a tracker beats a fixed-rate mortgage, it is about the best product for each individual client, and for many, even if they do end up paying more, the knowledge of security with a fixed-rate product is priceless.

 

Name: Paul Hunt
Company: Phoebus Software

With a 0.5% BBR, all lenders anticipate rate rises in the next two or three years. As a result, fixed-rate deals are higher than variable-rate deals. In order for a fixed-rate deal to be sold, a borrower has to believe that a rate rise will be greater than the lender anticipates.

This will compensate the borrower for the risk of taking on the higher initial cost of the fixed-rate deal. The reason for the decline in popularity of fixed-rate deals is because of a psychological barrier on the part of the borrower. Currently, borrowers are less inclined to take on a higher initial rate in a potentially rising market than they are to take on a higher final rate in a falling market.

Compounding the problem is the issue that the margin lenders now want for mortgages is far higher than borrowers have been used to in the years before the recession.

Many borrowers will anticipate that margins will fall as more finance becomes available. This has two effects. The first is to counteract any potential BBR rise at least partly. The second is to have borrowers seek short-term lock in periods which tend to favour variable rates. These economic factors work against fixed-rate mortgages.

While the BBR rise might generate more activity in fixed-rate mortgage sales, it is more likely that the high margins will keep borrowers away in anticipation of them reducing.

It is good to see that a few lenders have cut the cost of fixed-rate products this week as it is difficult to see how they can continue to justify the margins.

 

Name: Mark Graves
Company: Linear Financial Solutions

Fixed interest rates have not moved much over this timeframe so we need to look for another reason in the drop-off in popularity. Swap rates did move upwards over the Christmas period so we should not expect a rush of lower fixed-rate deals coming onto the market to change the status quo.

So what else has been the major influence in the percentage fall? Two things – no scaremongering about the Bank of England increasing the BBR; and the comparatively competitive rates for two-year deals and lifetime trackers.

Not that the market has too much to crow about when we are still left trying to explain to a client why their 10% deposit interest rate is so much higher than that of a client with 30% – whether they have a fixed-rate or tracker mortgage.

I believe circumstances for each person should be judged on their own merits. A fixed-rate deal is still the best solution for many. The main point we need to understand is that brokers influence the products sold more than the clients themselves.

If interest rates rise, it does not necessarily follow that fixed-rate deals will increase as the fixed-rate deal will probably move upwards in response or be pulled altogether by the lenders while they reassess the situation.

We normally see an increase in fixedrate sales when the perception is that the interest rate may rise, and the ‘get one while you can’ mentality takes over. That is not a sound enough reason for me, but following the herd is a very British trait.