Interest Rate Cut: Last week proved to be another crazy few days as the Bank of England made the second extraordinary decision in a few days to cut the Bank of England Base Rate to a new historic low of 0.1%.
It was combined with the largest announcement of asset purchases, (Quantitative Easing) with some £200bn of government and government bonds, in order to help lower longer-term rates.
With Bank Base now at the lowest rate in history, we have seen a clamor for advice around what this means for mortgage borrowers.
The interest rate cut means that those on a tracker rate product will see an immediate benefit as ever, but I do not expect to see fixed rates also cut to the bone. As far as fixed rates are concerned, just because the cost of funds has decreased further, it does not follow that all rates will become cheaper. In the current climate, lenders need to preserve their margins more than ever, if not bolster them further.
Lenders have their own issues to deal with as many of their staff are off or working from home, so I do not expect to see much change from lenders.
We could also see the number of mortgage products available at the high Loan-to-Value level, (90% & 95% mortgage products), start to decline once more as lenders decide to ease down on the risk-curve.
Meanwhile, the Specialist lender space has other issues because of the way that they work and are financed, with some therefore unable to keep lending at the levels they have been recently. To this end, we have seen some lenders, unfortunately, remove all their products for the time being or reprice upwards to protect themselves and stem the flow of business.
Hopefully, this will be a temporary measure and the Specialist lenders are key to a healthy mortgage market.
As a result of the interest rate cuts, lenders are struggling to make tracker rate products viable and have started to remove them from their product range altogether. Nationwide, The Mortgage Works and Metro Bank have acted quickly in this regard.
According to Moneyfacts data, 11 lenders have pulled offerings from their range since 11 March. With other lenders probably looking to follow suit, or increase the margins on their tracker rates to avoid being caught out if the Bank of England feels forced to even introduce negative interest-rates, we could well see the tracker rate become if not extinct, temporarily hibernated for a while.
It is important for everyone on a tracker to check their terms and conditions to see if lenders have any minimum “collars” on their products. This means that there is a fixed, lower-level beyond which they will not reduce their rate however low, or negative, Bank Base Rate goes.
We have already seen a spike in remortgage enquiries as people want to get on with locking into a rate now before some lenders possibly start to make things that little bit more difficult. As mentioned above, we have already seen some lenders increase their fixed rates so do not necessarily expect that there will be a whole host of even cheaper rates in a few weeks’ time.
There is also a note of caution for those looking at taking up the Governments and lenders offering of a 3-month payment holiday. We discuss the full details in our post here, but we are seeing some lenders refuse a remortgage or even a Product Transfer for those who have applied for a payment holiday.
It pays to, therefore, to take advice now and arrange a product transfer or remortgage first if at all possible.
For others, taking advantage of switching to interest only on all or part of the loan, capital raising for an extra capital buffer or switching to a more flexible offset mortgage at this time could prove to be a very wise move.
For anyone looking at remortgaging within the next 6 months now seems the time to get on with it, but make sure you take professional advice.
Another consequence of the current crises that may have been missed is that the reduction in rates means that most lenders have also taken the opportunity to reduce their “Stress Test” levels. Lenders need to ensure that the test not only that borrowers can afford the loan at todays rates, but also at an increased rate of around 3% above their variable rates.
With this falling, borrowers may now find that they can borrow that little bit more than they could have last month.
As always, our professional advisers are here to help – just click here.