Why Banks Want You To Fix Your Mortgage

Posted on March 22, 2011 by Roberta
Posted in UK Property Market Comment Tagged banks, explained, Fix, mortgage, why

I’ve chatted a lot on twitter to people about the ever changing interest rates and whether to fix your mortgage rate now while they are ‘cheap’ or stay on standard variable rates.

Now, I’m not a mortgage broker, so this is only my opinion, but remember, mortgage brokers do have a vested interest in getting you to move companies – they earn a fee for doing so.

Nothing wrong with that, just stating a fact.

Banks Cover Their Own Backs First

Everyone should know by now that the reason that banks want you to fix your mortgage is because they seek to cover their own rear ends, even when things go incredibly pear shaped and they end up in the poop themselves. The bottom line (!) is that they are there to make money.

There has been a lot of discussion in the press of late as to whether people should fix their mortgage or not. Generally this comes down to personal circumstances. That said, one main thing to remember is that if you change mortgages there are fees involved and these must be taken into account along with the loan to value and the interest rate.

Also, banks are sneaky, they add all sorts of bits to the other end of a loan like EDR ( fees for early redemption) or a much higher rate when you come off the promotional fixed rate.

For example, a current loan from Skipton has a 90% loan to value five year fix at an eye watering 6.49%. Whichever way you look at it, that is a painful loan. At the moment banks want you to fix your mortgage and put in a big fat deposit to secure a lower rate, or, they want a massive interest rate. In some cases they want both. Either way they have covered their back end nicely.

Current Loans

The current crop of 3 year fixed mortgages are at around 3.5 to 4% for those with a mighty deposit of 20 to 40%. The 5 year fixed are hovering around 4.6 to 4.9% but all with huge deposits required. This is known as having you cake and eating it.

In my opinion, if a bank charges 4.5+% interest for a fixed term of 5 yrs-to me the message this sends is; “this is where we expect the interest rate rises to possibly end up within the next five years.” ( Plus a little on top for good measure.) looking at the rates available, banks clearly feel that we are heading back towards the 5% mark within the next 5 years.

What Does This Mean?

So, with that in mind,do you really need to listen to the banks and fix your mortgage now? After all, it’s very likely that rates will creep up over a long term. They will not be 1% one day and a month later 5%. There is no need for panic. Banks offer fixed rates to make more money. It’s for their benefit not yours. Work out how far rates need to rise before the mortgage rate puts you will be in trouble financially.

Like any business, banks need to show regular income on their balance sheets so they can plan future lending. Fixed terms do that for them.

Another reason banks want huge deposits and to fix your mortgage is because their vaults are empty due to all the ‘virtual lending’. They need to get more physical money in the vaults.Without this they cannot lend in any form. So a big deposit or high interest rate- or if they can get away with it- both, will do very nicely thank you.

Think long and hard before taking out a fixed rate and be sure to compare the costs over the whole term of the loan, not just the fixed term.

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http://www.lentunegroup.com Stuart

Good blog piece Roberta, appreciate the points you are making regarding lender pricing on mortgages.

Just a couple of things to add from my point of view not only as a broker, but also as an ex-mortgage adviser with two high street banks. As a result I understand the processes involved in rate pricing.

Firstly, Fixed Rate pricing. Lenders have various ways of pricing these, but they are mainly linked to swap rates on the money markets. These raised towards the end of 2010, but have since stabilised.

The fixed rates on offer will not be directly affected by Bank of England’s interest rates – that is a red herring. As BofE interest rates increase, it is likely that the fixed rates will as well – so the ratio argument for fixing later doesn’t really work.

Also, lenders only offer their fixed rates with ‘pots’ of lending. For example, once that pot of money has been lent, the deals will be repriced as they buy more money in.

What this does affect is when there is a ‘rush’ of enquiries and applications – rates disappear quickly.

That is why you are seeing more mortgage brokers encouraging borrowers to review now – many are unaware of their options moving forward.

It is not just about earning commission – that is an unfair assumption – if we advise clients to stay with their current lender, we rarely get paid.

Secondly, and this is really important. If a mortgage holder is paying the lender Standard Variable Rate, unless the SVR is declared in the existing mortgage as being LINKED to the Bank of England base rate, any future rate rises passed on, may be HIGHER than those announced by the BofE.

The lenders have done it before, where a 0.25% base rate rise has been passed on as 0.50%.

http://www.mypropertymentor.co.uk/ Roberta Ward

Thanks,yes Im aware of the swap rate etc. I did not say it’s only about earning commission, the blog isn’t about mortgage brokers per se, just that they are part of the whole as a system.( That’s a whole other blog!)
Of course there will be time when good brokers advise staying put, as there are plenty that don’t act quite so diligently.Quality advice is key and there are good and bad.

Yes the base rate passing on is just another way banks gain more than their due from the customer.

http://twitter.com/Omnisfs Stephen Wrigley

Hi Roberta I think Stuart raises some good points here regarding the way in which banks price their funds. The other thing that we need to remember regarding lending at higher LTV’s is that it will affect capital adequacy requirements. I appreciate a number of brokers/advisers may have tainted the name in the past however it is frustrating when tarred with the same brush. I recently lost out on a £500k case as told the client to port with their existing lender, best advice but i got paid nothing. The other area thats worth a mention that has not been touched on here is that regardless of what we all think interest rates may or may not do each individual has their own risk profile. Many out there prefer the security of a fixed rate so they can budget monthly if thats the case a variable rate of interest is not ideal. So really as it should be it very much depends on the clients

*Editor-please note -no external links allowed in comments*
http://www.mypropertymentor.co.uk/ Roberta Ward

Yes, you are right, of course it is in the clients hands to decide upon their risk factor- but this blog wasn’t about that per se- it was about some of the reasons banks will want you to fix your mortgage at present. The discussion on this article is also going on at Linked In too, and I did say over there that I was not blaming brokers. Everyone has to make a living and all brokers are not the same.
The fact remains that interest rates will have to rise a lot before they become less competitive than a fix at current levels.
http://blog.badcreditwhiz.com/ Bad Credit Mortgage

I do agree but most of time banks creates difficulties for mortgage borrowers even if the have paid off there loan.