Mortgage Rate Rises
- Thread starter glenimp617
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6 months, you can agree to as many mortgages as you want until you sign on the dottled line
6 months. Some lenders, if remaining with them, will allow the new deal to start 6 moths before. No point doing that now though with rates coming down - used to be a good option when your new payments would be lower due to better LTV.
Get rid of ERC's and watch the interest rates charged on mortgages rise significantly...
The banks obviously have to themselves engage in longer term financial planning when lending money for mortgages and if you get rid of ERC's would mean they would need to charge higher overall rates due customers switching more often due to the vagaries of interest rates.
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Soldato
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Could end up seeing something like the mortgage indemnity guarantee returning.
When I was young I paid them twice, was something like 3% of my purchase price over 70% LTV, gave me nothing, but gave the lender protection against them losing money.
Had basically zero benefit for the purchaser and you had to pay, in total, up front.
Soldato
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I think it would need to me more than just the rate however
The more I think about this the more I think it will end up on product fees
Cant afford our product fee, thats fine it can be added to your mortgage
Which in just about every way i can think would end up being worse than the current situation.
Its also just ability to cope within the banks/building societies.
Eg society 1 decides to drop its rate 0.1%, they get 500,000 remortgage applications before they switch off the ability to apply.
The potential added costs from all the admin sound horrendous!
Sounds like you would potentially end up with gatekeeping of applications being able to be made, much like how my parents described buying a house when I was young.
You needed to wait for the local building society to open their applications and when they hit the lending planned that was it, it was stopped.
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Soldato
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I can certainly see the point being made, and some penalty is likely needed for exiting a deal very early or very frequently. But people don't jump usually for small changes in rate - do people jump savings accounts if a competitor offers 0.1% more interest? If that happened then almost everyone would have their savings in the top paying account all the time which isn't the case.
So I guess it just needs to be fair and not too prohibitive to a fluid market whilst protecting the consumer. I think people should be able to fix for longer at low rates, risk for the bank is really quite low I think, as long as they've done their affordability checks properly.
Banks could be more innovative too - like allowing a switch to a cheaper rate at any time with the same bank without penalty. This would promote, dare I say it, customer loyalty and a good reputation!
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Soldato
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People are far more likely to jump for 0.1% on a mortgage of hundreds of thousands than a few £ in a savings account. But even with the few £ people do it now.
We are back to the people should be able to secure low rates thing again I see. Not having a go at you specifically but again your arguing that we should just screw savers.
If everyone could switch to lower at and time there has to be something else that gives that triggers the profit in the bank.
All these ideas keep sounding like they will simply screw the banks.
Do we start to go back to paying for all transactions in bank accounts again or something like that instead.
It would be bad. The banks would jack up the rates or, more likely.. The initial fees.
Effectively you would be paying for it one way or another.
What would be better imo is a fixed erc structure.
I personally like the
5,4,3,2,1 for a 5.
3,2,1 for a 3
Problem comes, and it was what put me off a 10.
10 was 5,5,5,5,5,4,3,2,1
That was too much. Me and gf could break up, if want to move and can't port 5pc is too much.
If I manage to emigrate.. 5pc is too much.
A 5,4,3,2,1 then 1 for anything over 5 would be more fair.
I'm happy to pay 1 pc but I do not want to be paying 5pc half way through.
When I took out our first mortgage I had no idea about ercs. Never was told about them etc. Luckily I wasn't with santander. I think they had a 3,3,3 on a 3 year. I wouldn't have been able to justify paying 3pc of 200k and now I'd be on a 5pc mortgage rather than a 1.9pc mortgage.
My erc was 1pc in year 3 on 200k this 2k. Which was far easier to stomach than 6k
Thank goodness I didn't go for santander, but it was just luck.
Effectively you would be paying for it one way or another.
What would be better imo is a fixed erc structure.
I personally like the
5,4,3,2,1 for a 5.
3,2,1 for a 3
Problem comes, and it was what put me off a 10.
10 was 5,5,5,5,5,4,3,2,1
That was too much. Me and gf could break up, if want to move and can't port 5pc is too much.
If I manage to emigrate.. 5pc is too much.
A 5,4,3,2,1 then 1 for anything over 5 would be more fair.
I'm happy to pay 1 pc but I do not want to be paying 5pc half way through.
When I took out our first mortgage I had no idea about ercs. Never was told about them etc. Luckily I wasn't with santander. I think they had a 3,3,3 on a 3 year. I wouldn't have been able to justify paying 3pc of 200k and now I'd be on a 5pc mortgage rather than a 1.9pc mortgage.
My erc was 1pc in year 3 on 200k this 2k. Which was far easier to stomach than 6k
Thank goodness I didn't go for santander, but it was just luck.
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Soldato
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Why would these ideas screw banks profits? The profit from a mortgage deal, I believe, comes from the difference between the rate the consumer is paying and the rate the bank has secured either from its own operations (opportunity cost of its own reserves) or from the money markets.
As long as the consumer is paying in excess of the rate/costs that the bank incurs, the bank is in profit. How much profit is reasonable is a different question and of course competition comes into that as well, as well as the handling of risk (bad debt risk from the customer).
Given that the vast majority of customers do not default (?) and house prices generally keep rising, then the risk of a bank losing money from a residential mortgage is quite low I think. Therefore profit margins should also be quite low to reflect this.
A bank will always secure money at a lower rate than it charges a customer, that's its core profit making ability - so as long as it is effective in doing this, a longer fixed period, lower fees and lower rates should not be too much of a problem. Just requires the bank to be efficient.
As far as the main BOE interest rate goes, then you already know my thoughts on that for residential mortgages.
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Soldato
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You answered your own question.
The banks already have risk, they secure longer term funding to lend (its a little more complex but lets just keep it simple)
If they borrow that £100k to lend to you and then rates start to drop you would expect a drop in your mortgage rate so their profit is squeezed.
If over time the profit could be squeezed more and more then they are going to look to maintain the profit somehow.
Really this latest focus feels just like the latest version of people who don't pay attention to what they are signing having buyers remorse.
Yes longer term fixes do tend to have a longer higher penalty.
Mine from memory was the same as you describe. 5,5,5,5,5,5 then decline
Bear in mind its also on the net amount after the annual allowed overpayment. So its very much dependent on individual circumstances if its paid earlier.
If you have paid minimum mortgage for 3 years on a 10 year fix and have a term of 30 years the ERC will still be significant. Mine was potentially 5 figures for a while.
Like I said earlier to my mind setting a max % (gov legislated) and having that adjust automatically based on the term makes most sense to me.
5% x [length of fix/remaining years of fix] gives a straight line from 5% to 0%. Seems a pretty fair balance between the bank and the individual.
Or eg they could say the max % is 3% upto 5 year fix, and 5% for upto 10 year fix and 7% for longer than 10 year fix.
When you have a significant ERC of said 5 figures, is the idea that your new mortgage you take out you pay this charge by way of adding it on to the new amount you borrow? Or is that not possible because you need the ERC paid in order to start the new mortgage?
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Soldato
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Aren't banks big and strong enough to leverage their own suppliers of money for a lower rate too?
Someone somewhere is creaming off the profit from moving rates.
Imagine you take a fixed rate mortgage at 5% for 10 years. Base rate goes up to 10%. You have their money and are paying them 5% for it. But to replace that money they lent you, it now costs 10%. Or to put it another way, if they still had that money instead of lending it to you, they could lend it to someone else for over 10%.
Now flip it round so the rate drops from 5% to 0.1%. If there is no ERC, you exit their mortgage. So they no longer get 5% return on their money, they get whatever their new lower rates are when they lend to someone else.
ERC mitigates this sort of unilateral exiting of mortgages where the customer holds too much power and can just stay if it is in their interest or leave if it is in their interest (no pun intended). The lender on the other hand has no choice, if the customer wants to keep their 5% mortgage you can't get the money back before the term is up, even if that's really unprofitable use of capital compared to market rates.
Personally, I don't see how fixed rate mortgages are viable without ERC unless there is either some other disincentive from switching mortgages (perhaps high setup fees across the board) or the rates become less competitive because they need to hedge against interest rate fluctuations more than they do today with ERC. IMHO, getting rid of ERC would be a BAD thing for consumers that just want to take a mortgage for X years and not exit early, as you'd have to subsidise others rather than those that want to leave early paying a fee, and those that don't, don't pay a fee as it is now. I don't want to pay more for a mortgage just because someone else wants to change their mortgage before their term is up.
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Soldato
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Again what about all the people who have savings, they should all accept basically nothing so that borrowers can have cheap loans?
There has to be a reasonable balance between lenders and borrowers and that has only just in effect reset.
Thats kind of another challenge
If you need to pay an ERC to leave a deal, you need to pay the ERC
You may be able to get a new lender to add the ERC to the outstanding mortgage balance, but right now it basically doesn't happen that way.
Soldato
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I completely agree that interest rates have been too low for too long. What is unfair is the timing and speed of the reset. The policy has been wrong for 20 years, its wrong to fix it in 6 months and drop people in the mud.
I also think mortgages are somewhat different - this is for a home, an essential of life. Rates for mortgage are of course lower than short term loans, and people are protected somewhat by fixed rates, but more effort should be made to give mortgage holders more stability because volatility in that area can cause real big problems for people. I believe there is a difference between something like a mortgage (or rent) and more discretionary purchases like cars or new shoes on your credit card. I would even say there should be a policy difference between your first (for most people, only) home, and any subsequent houses you buy.
If you want a strong growing economy where people have money to spend, you can't go ramping up mortgage rates and stretching people too far. People with savings might not like earning low interest, understandable, but they still have that cash. Yes its devaluing, but its still there ready for that rainy day. Someone with a decent chunk of savings should count themselves lucky that they have that, most people don't. If they wanted more growth, there is always the stock market like we've been talking about in the pensions thread.
I built up £40k savings for my house deposit over 8 years or so, I earned next to no interest on it. Then I buy a house, and then face a huge risk of mortgage step change when my fix ends. I don't want to make this about me, but that example isn't really fair is it? Shafted on low rates, then immediately shafted on high rates. You couldn't make it up.
Have you only just realised one of the main ways banks make money?
These sorts of sentiments are stupid.
Reminds me of all the furore over overdrafts.
The banks were prevented from charging fines for unauthorised overdrafts and so their response was just to jack up everyone's overdraft rates, including thoose with 'authorised' overdrafts, massively.
In my personal case my 'authorised' HSBC overdraft more than doubled to 40%!
Needless to say it never gets used now.
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