Fix now before mortgages soar

Published 02nd Jun 2010

Borrowers will suffer as lenders lift profit margins

BORROWERS have been warned that mortgage costs could soar over the next two years even if Bank rate remains on hold, pushing up repayments by as much as £3,000 a year on a £200,000 home loan.

The alert comes as the best five-year fixed-rate loan fell below 4% last week for the first time since May 2009. Britannia and the Co-op launched a deal at 3.99% with a £999 fee for those with a 25% deposit.

Credit Suisse predicted last week that lenders will increase profit margins on mortgages by 1.5 percentage points to 2.5% above the cost of funding over the next two years. Banks could seek to do this by raising standard variable rates for existing customers and raising margins on loans for new borrowers, Credit Suisse said.

Indeed, Lloyds, which is 41% owned by the taxpayer, said last week it was raising its SVR from 2.5% to 3.99% for new borrowers and existing customers who increase their mortgages. The rise applies to Cheltenham & Gloucester but not Intelligent Finance.

David Black of Defaqto, the data firm, said: “This creates a dilemma for Lloyds customers considering remortgaging, as they will lose the 2.5% SVR which is guaranteed to be no more than 2 points over Bank rate.”

Credit Suisse estimated that banks could rake in £7 billion by boosting mortgage margins. This, along with falls in bank shares in the past four weeks, has prompted it to upgrade its forecast for British banks. “We think the UK banks [shares] now offer upside potential,” it said.

Brokers recommend borrowers who want to fix opt for a five-year deal to guard against rate rises for a longer term. While the cost of such deals is coming down, profit margins for lenders are extremely high.

The average five-year fix remains at 5.73%, while the wholesale cost of funding the deals (five-year swaps), is just 2.4% — a 3.3 point profit margin, according to Moneyfacts, another data firm.

Will five-year fixes fall further?

Britannia’s launch undercut the previous market-leading deal from First Direct at 4.29% with a £998 fee for those with a 35% deposit. HSBC, which owns First Direct, would not say last week if it would engage in a price war to gain market share.

Should I take out a fix or a tracker?

The market-leading tracker is from First Direct at 2.39% with a fee of £499 for those with a 35% deposit. The deal has no penalties so you can switch at any time.

Figures from L&C, the broker, show that the Britannia five-year fix at 3.99% would work out cheaper than the tracker for most borrowers. The advice is based on the Bank of England’s assumption that the first rate rise will take place in the first quarter of 2011, rising to 2% in the first three months of 2012 and 3% in mid-2013. The L&C figures then assume Bank rate is on hold at 3% for the remainder of the term.

The Britannia deal would cost £63,274 over five years — £832 less than the First Direct tracker at £64,106 and £1,570 less than staying on a 2.5% SVR, which would cost £64,844 over the five-year term.

However, the picture is very different when modelled on a five-year fix at 4.3%. In that case, you would be better off remortgaging to the First Direct tracker, while those on a 2.5% SVR should also stay put.

What is the outlook for Bank rate?

Last week, the Organisation for Economic Co-operation and Development said interest rates would have to rise to 3.5% next year to combat inflation.

However, money markets predict Bank rate will be 1.2% by December 2011.

Source: ' Times '

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