Private Finance's Mortgage Memo - 21st September 2021
This is our take on what is currently happening in the mortgage market. Our views are often cited in several national publications, including; BBC News, The Times, Telegraph, City AM, FT Adviser and Daily Mail, as well as a number of key trade publications, so this should keep you ahead of the curve. If you have any questions on any of these stories, or would like further information, please do not hesitate to get in touch.
- More product innovation around early redemption charges needed
- HSBC enters the 5.5 x income market
- First 2-year fixed to go below 0.8%
More product innovation around early redemption charges needed
Fixed rates generally come with early redemption charges if the loan is redeemed within the fixed term period. These vary lender to lender, but the classic structure is 2-year fixed - 2% of the loan amount in year 1, 1% of the loan amount in year 2. A 5-year fixed is generally 5% of the loan year 1, 4% year 2, 3% year 3, 2% year 4, 1% year 5. These structures almost never change and have been the same whether rates in the market are 3% or 1% like we are currently seeing.
- The justification for early redemption charges is usually banks will come to cost either acquiring the money that is lent so they have to make sure when committing those funds, they are getting a set level of return. However, the question is, why like interest rates can't early redemption charges move in line with levels of interest in the economy? If a bank was happy with this structure when levels in interest in the economy were much higher in years gone by, why when the base rate is 0.1% are we expected to pay the same level of early redemption charge when taking a new deal?
- NatWest and Nationwide have adapted their structures slightly within the last year, but there seems to be a real lack of flexibility in this space and for those looking to move up the ladder quickly, increased flexibility would be a huge help.
HSBC enters the 5.5 x income market
HSBC launched a new 5.5 x income product this morning, available for earners over £100k per year up to 90% LTV, unlike Nationwide’s 5.5x offering this can be done on any of their products including a 2-year fixed term (where nationwide is only for 5 year +). Moreover, this is total income and can include bonus and commission so is thus available to a wider audience. There are other lenders in this space, but this gives a large amount of increased flexibility for many.
- While the very low rates on offer grab the headlines, developments such as this affects a far greater number of borrowers and there is no differentiation with these rates compared to HSBC’s standard products and thus are market leading at this LTI and LTV.
- With all these major changes, much like sheep other lenders will follow close behind, so we suspect rates at the 90% LTV range, even at this high loan-to-income ratio will become increasingly competitive. Lenders can only do a certain amount of business at high LTIs so that is why they have strict criteria like only for larger earners.
First 2-year fixed to go below 0.8%
The Coop / Platform (their intermediary side) has just launched a 2-year fixed rate product at an astonishingly low 0.79%. We have been surprised at the speed of decline of the rates on offer at present and this is a significant fall from the previous best rate available of 0.84%. This is particularly surprising giving the recent inflation data to emerge and comment that the Bank of England may have to raise rates to curb inflation if it continues to grow.
- Lenders however are currently in a rate war to get the headline grabbing rates, and while they are of course not available to the majority of borrowers, only those with low LTV's (<60%), good loan-to-income ratios and unblemished credit records, this is a significant rate cut.
- Banks and lenders have a lot of cheap money at present and as the market slows are actively competing to lend it. We suspect we could even see rates drop further in the coming weeks and a lender coming in at 0.75% is highly likely soon...