A Fixed Rate or Variable Rate?

 

With the base rate having recently been cut by 0.5% and predictions from some pundits that base rates will fall below 1% within the near future, most purchasers and remortgagers face a new dilemma.

 

Do you play the waiting game and allow your existing deal to expire moving onto your lender’s variable rate, or do you make a decision to obtain another deal, doing the best you can from the deals available when your advantage period has ended?  

 

The downsides of the first option are that you may be coming out of a deal that was charging you less than 5% and the variable rate could be in excess of 7%.  This would mean significantly higher payments, whilst you are biding your time waiting for the right moment to strike.  Also, it needs to be remembered that house prices are still falling and deals that are available to you now, may not be available in six months time.  For example, most remortgage deals will lend no more than 90% of the value of your property.  If you are comfortably inside at the moment, at say 85%, in six months time with continued falls this may not be the case.

 

The downside for the second option is that by opting for a deal now, certainly if it is a fixed rate, you may find you are paying a significantly higher rate than will be available in six months time.  But unfortunately you will be tied in and not be able to access better rates without paying a hefty penalty to the existing lender.  This penalty in many cases will be too big to justify switching again.

 

One would imagine that by taking a variable rate or tracker deal, at least if as expected rates fall, that you would benefit from this.  However, it does appear that even with the recent base rate cut, most discount and tracker rates are still more expensive than long term fixed rates, with another 0.5% cut required to make them competitive in most cases.  It also needs to be mentioned that although base rates are expected to fall, this can be by no means certain and you could be caught out if rates move upwards.

 

As always your personal circumstances should dictate the way you behave when securing your next mortgage deal.  If you have a mortgage that you would still find affordable even if interest rates rose a few percent, and you have plenty of equity in your property, then waiting may be a realistic option .  

 

However, if you are running out of equity due to price falls and your income is starting to come under pressure due to changes in the economy, then it is worth grabbing a deal whilst you can.  

 

The decision to fix or go for a variable rate depends upon a number of things, such as how much pressure variable rate rises would put on your family budget.  If the answer is a lot then fixed rates could be prudent.

 

Deciding whether a fixed or variable rate deal is right for you can be a tough decision and may need the help of an Independent Financial Adviser.  Kieron Bassett Financial Services have two IFAs.  Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or log onto www.kieronbassett.com/cms.

 

Kieron Bassett CertPFS

28 October 2008

Return to Record Lending?

Details of the government’s plan to underpin the banking sector have been trickling through over the last week.  They involve limits to employee remuneration and a pledge by the banks to return to lending levels of 2007. 

 

Gross lending in 2007 was at an all time high, totalling £363 billion.  According to the Council of Mortgage Lenders, lending in 2008 will be close to £255 billion.  The vast majority of lending in 2008 will be remortgages, approximately £172 billion, with only £85 billion being for house purchases. 

 

Although in 2007 lending for remortgages was higher than it will be for 2008, £209 billion, the main contribution to lower lending in 2008 has been the reduction in advances for house purchases.  This has fallen by 45%, from £155 billion to £85 billion.

 

The figures paint a picture of the problems we are experiencing globally, with individuals struggling to raise finance and the subsequent problems of house price reductions.

 

My belief is that the lenders will not return to the lending figures of last year any time soon.  In fact, within two days of the pledge to return to lending levels, The Nationwide Building Society and the Skipton Building Society both reduced their maximum loan to value by 5% to 85%, and The Mortgage Works will now only lend if you have a deposit or equity of at least 30%.  I expect that other lenders will follow suit in the course of the next week. 

 

There are currently only 10 or so lenders willing to offer a 90% mortgage.  Rates at this level are between 6.25% (but with a 2% arrangement fee) and 8.19%.  A competitive deal at this level is with Cheltenham & Gloucester at 6.59%.  However, we must bear in mind that the Bank of England Base Rate is currently 4.5%, so to talk about a loading of more than 2% to the Base Rate as being competitive is definitely a new world.  In 2007 lenders at 90% were offering mortgages with little or no loading to the Base Rate. 

 

As the figures above indicate, to increase lending levels we need to encourage people to buy.  This can be achieved by lowering interest rates and making home ownership more affordable.  I expect the Bank of England to continue to cut interest rates over the next 12 – 18 months as inflation figures filter through.  Inflation is likely to drop to 1% or even below during 2009 and this will allow the Bank of England to reduce the headline rate significantly.

 

If you are considering buying and would like to discuss your options, or if your mortgage is due to reach the end of it’s tied-in period, you should contact an Independent Financial Adviser.  The IFA will discuss your options with you and recommend the most appropriate course of action. 

 

Kieron Bassett Financial Services have two IFAs.  Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or log onto www.kieronbassett.com/cms.

 

Adam Elkin CertPFS

20 October 2008

Bank Base Rates

 Last week the Bank of England in a surprise move cut the bank base rate by 0.5%.  This action could bring much needed relief to the mortgage market and for one group of borrowers in particular.  I refer to borrowers who have come to the end of their mortgage deal and have been unable to negotiate another deal.  The reasons for their inability to rearrange include slipping into negative equity and stricter underwriting from lenders, with existing lenders unwilling to offer a new deal.  Therefore they have been left with variable rate mortgages as a result of not fitting new lending criteria.  So this has meant a big hike in mortgage payments for many.

 

Unfortunately, payments in some cases have gone up by as much as 2.50% as variable mortgage rates can be as high as 7.49%, and if a sub prime deal was originally taken out rates in some cases are now topping 10.00%.  Hopefully the rate cuts will be passed on to this group of people and more rate cuts will help them to achieve affordability more easily.  Also it could be argued that the Banks armed with capital from the taxpayer should consider offering new deals to customers described above to help ease their burden.  I think that it is only reasonable to do this for borrowers who have conducted their accounts in a responsible manner and have not been reckless borrowers.  If this approach was taken not only would it be good for the borrowers, but also for the public in general as action taken would help support the housing market.  In addition these actions could help to reduce the level of repossessions and all the misery that is associated with it.

 

For people who are getting the benefit of the rate cut and can afford to maintain their existing payments I would urge them to do so as not only will they be reducing their mortgage term, but by reducing their balance are more likely to become eligible for a deal sooner.  I believe that the action taken last week could signal a turning point for the mortgage market with rate drops increasing affordability, together with falling house prices making the mortgage market a more attractive place to be for lenders and borrowers alike.

 

With the uncertainties in the market, it is difficult for borrowers to decide whether to select tracker or fixed rate products.  It is worthwhile contacting an IFA who specialises in mortgage to help you decide which way to go.  Kieron Bassett Financial Services have two IFAs.  Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or log onto www.kieronbassett.com/cms.

 

Kieron Bassett CertPFS

14^th October 2008

“I’ll do whatever is necessary” – Darling

“I’ll do whatever is necessary” – Darling

 

In an emergency statement to the House of Commons, the Chancellor of the Exchequer Alistair Darling promised to do whatever is necessary to solve the problems in the financial system.

Speaking to MPs, Darling argued it was essential the Government took action to support the banking system as a whole, as well as being prepared to intervene in individual cases where necessary.

Darling revealed the Bank of England would tomorrow inject £40bn into the market to improve liquidity, taking on a wider range of security, and would continue with such injections until November.

The Chancellor also emphasised the importance of collective action. He said: “I have always been clear that each country needs to do whatever is needed to deal with its own particular circumstances. However, I also believe that wherever it is possible to do so, countries should work and act together to maintain stability.”

Darling will now fly to Luxembourg to meet fellow European Finance Ministers to discuss how to bring stability to the system and protect depositors. He will also attend G7 and International Monetary Fund meetings in Washington later this week.

Concluding his statement, Darling said: “I have made it very clear that the Government stands ready – with the resources and the commitment – to do whatever is necessary. Our priority, at home and abroad, is to bring stability to the financial system, ensure depositors and savers are protected, and defend the interest of the taxpayer.”

Banking Crisis

The markets are moving so quickly at the moment that by the time our articles are published another bank has been taken over or another country’s economy is in crisis.

 

This morning, the German Chancellor, Angela Merkel, announced that her government would guarantee the savings of all individuals in German banks.  This follows the Irish and Greeks who have done likewise and the Danes soon followed suit.  It now seems inevitable that to retain a level playing field the majority of governments will offer similar guarantees.  But, how strong are the governments offering the guarantees?

 

Shares in financials in Iceland were suspended from trading on Monday due to significant fears for Icelandic banks’ balance sheets.  Also, the value of the Icelandic Krona has devalued by 20% against the US dollar within the last week.  Icelandic supermarkets are struggling to fill their shelves as suppliers are reluctant to take Krona as payment, for fear the currency will collapse. 

 

If an economy can disintegrate so quickly, what ability will the government have of compensating those who lose out due to the failure of their banks, irrespective of the guarantee which was stated?  I think their ability may be limited to say the least.

 

This is why savers have been flooding to invest money in gold as it seen as a safe haven for their hard-earned cash.  However, gold is not a “safe” investment.  The price of gold fluctuates wildly over time and you could lose money in the same way as stocks and shares investments.  The price of gold has more than doubled over the last three years, but if you bought Gold in the early part of 2008 you would have lost over 10% of your investment.  Between 1996 and 2001 the price of Gold fell by 35% and since that time has risen steadily.  The price of Gold is volatile.

 

Although it is prudent to be concerned about your savings, we should not throw the baby out with the bathwater.  The compensation schemes in the UK and around Europe, are designed to protect savers’ cash deposits.  Cash deposits are for those savers who need access to their cash readily or who are less inclined to take risk.  By moving those monies to a German Bank, and subsequently taking currency risk, or by investing in such assets as Gold, you are taking more risk with your savings than by keeping your money with your bank or building society. 

 

If you are concerned about where to invest your savings and would like a financial review you should contact an Independent Financial Adviser (IFA). 

 

Kieron Bassett Financial Services have two IFAs.  Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or log onto www.kieronbassett.com/cms.

 

Adam Elkin CertPFS

6 October 2008

Building Societies

The Demise Of The Mortgage Banks

 

This week I believe the Bradford and Bingley will cease to trade on the stock market and be Nationalised by the government as they have effectively gone bust.  This follows hot on the heels of the Halifax who were rescued by Lloyds recently.  Looking back a little bit further, Abbey National and Alliance Leicester have fallen into the arms of the Spanish Bank Santander, sparing their blushes as they looked destined to be heading in the same direction as their Yorkshire rivals.  Also this time last year Northern Rock was in the process of being Nationalised, so the proposed Bradford and Bingley deal neatly wraps up all the mortgage banks.

 

All of the above have little or no value now, however, it was not that long ago they were Building Societies that did most of the lending for house purchases.  The Banks had only a small percentage of the residential housing market and concentrated on traditional banking services.  I remember the government being anxious to preserve the status of Building Societies in the 1970s, giving operating advantages to these lenders in return for the stability that they offered.  The Building Society movement started in the middle of the nineteenth century as the industrial revolution was in full swing, and craftsmen and white collar workers started to get together to save money.  Once they had saved enough money they would buy land and build houses for the group of savers, winding up the project when everyone was housed.  This principle started to evolve as some societies started to become Permanent and the Building Society movement began to grow.  By 1913 the Halifax had become the biggest Building Society in the world and maintained this status until it demutualised.

 

In 1989 the largest Building Societies started to demutualise and became Banks.  This process continued until 2000 with ten of the larger Building Societies had become owned by shareholders rather than by their members.  This demutualisation experiment appears to have gone horribly wrong as none of the ten now survive on their own.  So what went wrong?  I remember that each time a Building Society discussed demutualising there was always a campaign to remain mutual.  The campaigners were extolling the virtues of the Society being owned by its members, that would keep interest rates low for borrowers and still be able to pay competitive rates of interest due to having no share holders.  The counter argument ran that by becoming a Bank, the former Building Society would be able to expand faster and offer more services due to its ability to borrow more money as a result of its new found status as a Bank.  Unfortunately, with hindsight the bank argument won in nearly all cases, with the promise of shares or cash to the accountholders bringing the Building Society to the market.  Shareholders then started to demand more, and more from these Banks and so risks increased as they struggled to meet the markets expectations.  The Bradford and Bingley, for example, decided to do little else but buy-to-let mortgages increasing their risk profile.

 

The recent crisis has brought about the demise of the Mortgage Banks, but I feel we only have ourselves to blame as we sanctioned the demutualisation process to earn a quick buck.  There was the perfectly good alternative of remaining mutual, and gaining the long term benefits that derive from being a member of a Building Society, but we  decided otherwise.  It is worth noting that through this financial storm we are currently experiencing, that as yet no remaining Building Society has gone bankrupt.  So perhaps we ought to be looking at this Financial model again and supporting it.  Maybe in recent years we have had the lenders we deserve, but now is the time to go back to our roots and support Building Societies again.

 

Kieron Bassett Financial Services have two IFAs.  Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or log onto www.kieronbassett.com.

 

Kieron Bassett CertPFS

 

30^th September 2008