Increased tracker margins wipe out effect of bank rate cut

Lenders are continuing to increase the margins on their tracker rates at present, although the good news for borrowers is that more competitive sub 5% fixed rates are coming to the market, some now available with flat fees below £1,500. Katie Tucker, Technical manager for John Charcol, comments: “Lenders including Halifax, Bank of Scotland and Coventry have all increased their tracker rates this week, Royal Bank of Scotland by 0.25% and Abbey by 0.35% in some cases. Contrary to Alastair Darling’s call to lenders to pass on the full effect of any rate cut, this totally eradicates the effect and renders it worthless to many borrowers.

“Lenders are clearly still recouping their losses from the liquidity crisis, which does not bode well for borrowers on discounts or Standard Variable Rates. After the last cut, around a fifth of lenders did not pass the cuts on at all, and many others only passed on 0.1 – 0.2%. I suspect lenders will be as reluctant to pass on any Bank rate cut moving forward. Arguably, monetary policy (reducing Bank rate to promote spending and thus growth in the economy) does not have the effect that it used to, particularly as most people have other credit as well as their mortgage now which accounts for a lot of their monthly debt repayments.”

FSA – Affordability remains key

The FSA this morning has outlined three high risk factors of a mortgage: A mortgage term of more than 25 years; A Loan-to-value exceeding 90%; and an income multiple of 3.5 or more. Tucker Continues: “Sustainable affordability is actually the most important factor to a mortgage. Borrowers who are concerned about their monthly outgoings exceeding their income should seek advice immediately. Most do not realise that their lender is obliged to look upon their situation sympathetically and even offer remedial options. A mortgage broker is also a good place to start to review your situation and discuss switching to a better rate.”

What products are available now?

Tucker continues: “Whilst tracker rates have increased, they still offer better value than discounts which depend on lenders reducing their own SVRs in line with Bank rate; something that cannot currently be expected. Trackers with no Early Repayment Charges (ERCs) are a good choice for borrowers who either expect Bank rate to be cut again, or who are riding out the uncertain market with a view to taking a fixed rate later. Britannia has released a tracker of 0.2 over Bank Rate for 2 years giving a current pay rate of 5.70%, with No ERC’s. Lloyds TSB is offering a tracker at 0.38 over bank rate for the whole term of the mortgage, for a £999 fee and with free valuation and legals for remortgages and no ERCs. National Counties’ 5 year tracker at 0.1 under Bank rate has a low rate and low fee of £395.”

“Fixed rates are improving, although funds are scarce so they are often running out and being withdrawn in less than a week, so borrowers must act quickly. Derbyshire, First Direct and Giraffe all now have fixed rates less than 5%, with flat arrangement fees of less than £1,500. National Counties has a very competitive three year fixed rate at 5.19% with a fee of only £595 making it market leading, and the Skipton has just released a ten year fix of 5.34%; now a realistic consideration for borrowers wanting to protect themselves for the longer term.”