The high potential for interest rate rises appears to be affecting the choices many borrowers are making when choosing a rate at the point of remortgage. Mortgage Advice Bureau conducted a survey of 550 mortgage brokers and 900 estate agents, which confirmed that 93 per cent of remortgage loans in June were secured on fixed rate options. The estimate stands that this is the largest amount of mortgages secured solely on fixed rates, since the Bank of England initially reduced the bank base rate to the current 0.5 per cent level back in 2009.
Homebuyers have been just as reliant on fixing, with 95 per cent of all new home loans being secured on a fixed rate for the first half of 2014. Mark Carney, the Governor of the Bank of England, has hinted over the past couple of months that interest rate rises are imminent, and has faced pressure in the past week to make the decision sooner rather than later, due to an unexpected rise in inflation. The continued uncertainty appears to be driving the fixed markets dominance in the mortgage sector, as many borrowers look to lock themselves into the security of a consistent interest rate.
While securing a fixed rate of interest appears to be the highest priority for borrowers, market commentators are urging mortgage lenders to educate their customers on the high risk of not planning for the future. The Resolution Foundation, a think tank incorporated of economic experts, has completed a study of the market that suggests roughly 2 million borrowers could face a precarious situation once interest rates begin the expected rise over the coming 2-3 years.
The expectation is that the Bank of England has to increase the base rate gradually to 3 per cent over this period, to balance the market and prevent any stagnation that could derail the improving economy. Authors of the study feel that acting sooner rather than later is the key, and they have recommended that the Financial Conduct Authority, the body tasked with regulating the market, must rule that lenders carry out financial checks on any customers that are in a potential position of failing to meet future mortgage repayments.
One of the key authors of the study, economist Matthew Whittaker, said: “We need to act now to ensure that all lenders seek out those customers who are just about keeping their heads above water in the current era of low interest rates in order to help them prepare for a future of higher repayments. Some lenders are already doing this, but it's crucial that the whole industry wakes up to the need to identify and engage with these at-risk customers."
He continued to say: "We need to prompt the most at-risk borrowers to confront the reality of what their finances might look like in a few years – even if it comes as an unwelcome shock to some of them. Many will be able to take evasive action and make plans for the return to an age of more normal interest rates. We mustn't look back at this period and wish we'd done more to prepare ourselves."
One lender continuing to update their lending policy to stave off any future issues is Santander, as yesterday the bank confirmed that they would be reducing the maximum age for an interest only mortgage to mature from age 75 down to 65. Many banks have for the past year tightened up their policy towards interest only borrowing, but several have continued to offer terms that are perhaps more flexible in certain areas than others have chosen to provide.
Mark McBurney of Contractor Mortgages Made Easy, a contractor specialist mortgage broker, commented on the change: “We have seen over the past couple of months, post-Mortgage Market Review, that lenders have tweaked policies so as not to face the ire of the FCA and the Monetary Policy Committee. This move by Santander can be seen in similar terms to that of the Lloyds Banking Group reducing the level of their income multiples over the past few weeks. No lender wants to be seen as not heading warnings from the regulator to protect customers at every opportunity.”
Article By: Simon Butler, Senior Mortgage Consultant at Contractor Mortgages Made Easy
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