What’s next for the mortgage market?

Jennifer Lowe

June 10, 2006

The turn of the year seemed to point to the continuing dominance of fixed rate mortgages. At one point, organisations such as the Council of Mortgage Lenders (CML) were indicating over 60 per cent of monthly approvals were for fixed products. However, as summer makes its first fleeting glimpses, the market has changed, with a greater interest in other product areas. Tony Jones, managing director at Pink Home Loans, says: “There is always room for fixed rates as some people like the certainty they provide. But there is no question that the market is moving away from fixes and looking at trackers and discounts, with brokers also mentioning capped products in the last two weeks.”

This shift from fixed to variable rate products has been brought about by increased volatility within the wider economy. The stock market has had a ‘correction’ which saw it drop away from the heights it reached earlier on in the year, unemployment has been slowly creeping up, with job losses at the Peugeot car plant in the Midlands a prime example, and swap rates have edged upwards, making fixed rate money more expensive.

Ian Giles, director of marketing at Kensington, says:” The Bank of England (BoE) Base Rate predictions all point to a move up which has had an impact on the money market and now there is about half a percent between fixed and discount rates.”

Now, instead of fixed rates being on top, industry commentators have stated some of the most competitively-priced deals are to be found among trackers. Joe Wiggins, media relations executive at Abbey for Intermediaries, believes trackers will become increasingly popular amongst borrowers: “The pendulum has swung more towards trackers. Most borrowers see the headline rate as the most important thing so at the minute trackers are what they are going for.”

However, despite a number of lenders switching much of their attention towards trackers, capped and discount products also have their place, as Julie Jones, head of intermediary sales at Coventry Building Society, comments: “Fixed rate money is more expensive now so our thoughts are moving towards tracker and capped. We see that’s the way forward in the future.”

However this talk of ‘the future’ is deemed, by some, to be a dangerous phrase to use in today’s climate. The current uncertainty has left lenders, brokers and clients all wondering what the economy will do next. Any predictions which were made as little as a month ago will have been thrown out the window and second-guessing the market has become trickier than ever.

Tony Jones adds: “You just have to look at the Monetary Policy Committee’s (MPC) last meeting and there was a three-way split in voting. The last time that happened was maybe a couple of years ago. This shows the uncertainty.”

This level of uncertainty is currently being typified by the move by a host of lenders to offer switch-to-fix options within its tracker products. Nationwide, John Charcol and Scarborough Building Society have all included such facilities in its ranges, that while offering clients flexibility, points to the fact that nobody knows what will definitely happen.

Mike Fitzgerald, sales director of Brentchase Financial Services, says: “It’s an interesting facility and people like to have facilities on their mortgage, whether they use them or not. Any lender who can offer facilities on its products will excite clients and switch-to-fix is one of those. Under the right circumstances, they can be very good for people who are not quite sure what will happen up ahead.”

However, the cyclical nature of the UK economy, and the UK mortgage market, means that things will change and there are signs that this is already taking place. Swap rates have shown signs of cooling off for the moment and while it may not mark an immediate return to a price-war at the two-year fixed end of the market, it does offer hope for those who want to have the security of a fixed product.

Jonathan Cornell, technical director at Hamptons International Mortgages, comments: “Lenders are not racing to reprice even though swap rates are slightly down on what they were. The future is too difficult to call. The majority of lending is now on trackers but if it stays the same and more exposure is given so people become worried about volatility then we might see a move towards fixed rates even if they were a bit more expensive.”

When this move might occur remains to be seen. With the World Cup just around the corner, the mortgage market, and the general economy, is poised to be dictated by the fortunes of the national team. A triumph is Germany could have a knock-on effect to the cycle we are currently in, throwing further spanners in the works and causing economists to reach for the bottle.

But then again, who’s expecting England to win anyway.

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