Mortgage Doom And Gloom Is Overdone!
I’m not sure about the exact situation in the USA, but here in England the same story is everywhere… 1.4 million people will come off “cheap fixed rate” deals in 2008 and will be hit with their mortgage lender’s full variable rate… which is likely to be much higher than their fixed rate deal.
Coming off a fixed rate to a standard rate happens to everyone who has a fixed rate mortgage, that’s the whole point of it… you start out with the low rate but the mortgage lender actually makes their money in the long term when you pay the standard rate. When our fixed rate expired, we just asked our current lender to give us a better deal than their standard rate, or we would take out mortgage elsewhere. Guess what? They said, “OK” and knocked a full 1% off of their standard rate for our mortgage. We ended up paying I think 1% more than the discounted fixed rate, but 1% less than the standard rate. We were happy and the mortgage lender was happy.
(Actually, we were happy mainly because we’d paid off the vast majority of the mortgage during the 2-year fixed rate… and the new, higher, rate would only apply to the “rump” of the mortgage we had left.) 
The problem now is that when it comes time to switch to the standard rate, mortgage lenders supposedly won’t be so likely to “cut a deal” with the mortgage holder because taking your mortgage elsewhere has become more expensive… rate have jumped and so have application fees… as lender’s tighten their belts.
Well, that’s the theory and supposedly it was even behind the Bank Of England’s decision to cut rates earlier last week… easing the transition from fixed rate to standard rate. Cliff D’arcy says that “in April 2001, when the base rate was the same as today’s 5.50%, Halifax’s SVR was 6.50%. After yesterday’s cut, Halifax now has an SVR of 7.50% — a full percentage point higher than 6½ years ago!”, and that, “mortgage arrangement fees have almost doubled in the past two years.”
Well, I don’t believe it’s as bad as it’s painted.
Just a little research at fool.co.uk shows us some cheap mortgage lenders still exist. For example…
Darlington 2.13% discount :
5.69% Until 30/04/10 :
Arrangement Fee: £474
Hanley Economic Fixed :
5.59% to 28/02/11:
Arrangement Fee: £649
Those are still decent deals which you can use to justify asking your current lender to match or come close to when your fixed rate deal is about to expire. After all, they will want to keep your business, just as my lender did.
update from the ThisIsMoney website…
“Ray Boulger at broker John Charcol in central London says borrowers should not panic. ‘Only those with adverse credit are having difficulty remortgaging to a competitive deal,’ he says.
‘That’s not to say the market won’t be tougher next year. All borrowers coming off special deals should brace themselves to pay more. But there will still be plenty of good fixed and tracker deals available.’
Borrowers coming to the end of a mortgage deal in the first half of 2008 should start thinking now about their next move. It is vital for homeowners, particularly those with credit problems, to act early and get advice from an independent broker who can search the whole of the mortgage market for new loans.
David Hollingworth at independent broker London & Country Mortgages in Bath, Somerset, suggests talking to your present lender first, as this will give you something to compare new mortgage offers against.
‘If it can offer you a reasonable deal it is worth considering, particularly as staying means there won’t be any need for a new valuation of your property or credit checks,’ he says.
‘But the majority of borrowers should not have any difficulty switching to any deal in the market if they want to take advantage of the best rates.’
Most mortgage deals can be reserved for up to three months and some for up to six months. But Boulger says: ‘ Borrowers who want fixed rates and can afford to wait could get a better deal if interest rates are cut again in the first few months of next year.”
They seem to agree with me. For most people there shouldn’t be much of a problem. Of course you’ll be paying more… your discounted rate ended… but it shouldn’t mean a financial crisis.
January 22nd, 2008 at 5:13 am
I am a little lost here on this post. In the US the fuss is adjustable rate mortgages not fixed rate. I have a fixed rate mortgage that will stay the same for the life of the mortgage. It will never adjust. Now an ARM (adjustable rate mortgage) will adjust to a higher rate (standard) usually after 3 to 5 years. Seems the words fixed rate has a different meaning in England.
January 22nd, 2008 at 12:12 pm
Yes, in England we don’t really have an equivalent to fixing the mortgage for the life of the mortgage. Although those offers are available, hardly anyone takes out such a mortgage.
[Currently only 25 lenders offer a 10-year deal; four lenders offer a 15-year deal; two a 20-year deal; three a 25-year mortgage; and just one - the Manchester Building Society- offers a 30-year fixed rate mortgage.
This is in marked contrast to housing finance in the EU and the US, where such deals are common.]
source: http://news.bbc.co.uk/2/hi/business/6292266.stm
So when I say “fixed rate” I mean “short term fixed rate deals of two or three years”, which are equivalent to your ARM’s.
Neil.
March 20th, 2008 at 8:51 pm
The difficulty in switching deals in the market is the costs involved in refinancing. Many times the costs are not worth the minimal change in interest rate.
April 13th, 2008 at 3:28 pm
Yes, there does seem to be a bit of a difference in the UK as opposed to the US relating to adjustable mortgages. In the US, arm loans are normally are based on the (short term) 1 Year Treasury, COFI, or LIBOR index. With the US Fed cuts in 2008, these short term indexs are at very low levels. Once the arm margin is added to the index rate, adjustments are not nearly as bad as anticpated.
April 27th, 2008 at 4:32 pm
Interesting post and interesting finding it almost 6 months on and after even more interest rates cuts, we all know that the ‘credit crunch’ hasn’t eased away yet and mortgages hasn’t become any cheaper. Will definitely keep an eye on this blog.
April 30th, 2008 at 9:24 pm
After Halifax and Abbey raised mortgage rates and other lenders followed Nationwide’s lead by cutting high loan-to-value deals, mortgage expert Ray Boulger, of broker John Charcol, described conditions as “deteriorating at a frightening speed”. But while the High Street big guns have been demanding higher fees and higher rates, smaller names offer some of the best deals.
May 23rd, 2008 at 9:29 am
I’m not sure about the exact situation in the USA, but here in England the same story is everywhere… 1.4 million people will come off “cheap fixed rate” deals in 2008 and will be hit with their mortgage lender’s full variable rate… which is likely to be much higher than their fixed rate deal.
Thats a real big problem! I ask myself if goverment can do anything?
Thanks
May 23rd, 2008 at 10:21 am
>I ask myself if goverment can do anything?<
What should the government do? Bail people out? I doubt that any of the people who took out mortgages were mis-sold. In fact, unlike the 90’s, most are on repayment mortgages (not interest-only), and put down larger deposits (there were many fewer 100% mortgages than in the 90’s). So, I don’t think people should be bailed out by the government.
The adjustment to the standard rate of the lender was always going to happen and should’ve been budgeted for. Interest rates are unlikely to rise to 15% like they did before… it’s only a few percentage points difference from the fixed discount to the standard rate.
Neil.
May 26th, 2008 at 7:51 am
If you want to be success on finance try to keep a balance in your monthly income. Maybe it is time to start your own business. Look around you and choose one of the varied ways to earn money by yourself.
Many thanks
May 26th, 2008 at 7:51 am
Bridging loans may be a good option to arrange your future plans in a very short term. Just pay debts first.
regards
June 9th, 2008 at 8:46 pm
Neil
First and foremost, cracking blog, I will be back to this regularly.
The mortgage debate will go on and on and I could talk about it for ages. I think the facts are that we are now almost certainly heading for a recession and house price defaltion is happening. Lets be real, not emotional but face the reality of the matter, house prices are going down.
There was a cracking article in the Mail last Sunday about the blame game. The Bank of England, the Treasury, the lenders and the FSA are all blaming each other. As an economist by trade, my view is that all are to blame and all will now suffer. However, I think that the consumer will suffer the most as is always the case and that house prices should never have been allowed to rise so far. From bottom to top, UK house prices rose 350%, in the USA it was only 250%! I hate to say it, but I always think that markets should be viewed without emotion, hold onto your hats!!!!!!!