Brokers say more people are heading for one type of mortgage, but it could catch them out
The mortgage market is currently volatile(Image: Daniel Leal-Olivas/PA)
Mortgage brokers have warned borrowers that certain lenders are widening their margins on selected tracker products, in some cases quite “generously”. While they agree lenders are doing nothing wrong and are either being “opportunistic” as demand for this type of mortgage increases, or managing volumes and risk, one broker called the situation “frustrating”.
When lenders widen their margins, they are effectively increasing the gap between the cost of funds for them and the interest rate they charge borrowers.
Louis Mason, communications director at London-based Oportfolio Mortgages, said: “We are seeing a bit of lenders widening their margins, yes. Tracker demand has crept up as fixed rates have felt eye-wateringly expensive and lenders aren’t daft, they price accordingly.
“Some of the margins on newer tracker products are a touch generous, shall we say. But I wouldn’t rush to call it profiteering.
“It’s more a case of lenders hedging their bets and managing pipeline risk in a volatile rate environment. When everyone piles into one corner of the market, pricing rarely gets cheaper out of kindness.
“The irony is that borrowers are chasing flexibility and potential savings, but if the margin’s been padded, the ‘deal’ can quietly lose its shine. It’s a bit like thinking you’ve found a bargain flight, only to discover the luggage costs more than the ticket.”
Darryl Dhoffer, founder of Bedford-based The Mortgage Geezer, said lenders were simply being “opportunistic”.
He continued: “Lenders know that borrowers are suffering with fixing-phobia right now. They are therefore pricing trackers not just on the cost of money, but on the value of the flexibility they provide.”
Sarah Fox-Clinch, director at Fox Davidson, said lenders “increasing the margins on tracker rates is particularly frustrating as swap rates do not affect tracker pricing, but affect fixed rate pricing”.
But she explained why some lenders are increasing their margins: “I think they are more comfortable with the majority of their clients being fixed into a product as this gives them a known ‘churn rate’ so they can predict how many people will be coming back to the product transfer and remortgage market at any particular time in the next few years. Many trackers do not have early repayment charges, so having a large percentage of their mortgage book able to leave them at any time isn’t what they want.”
Craig Fish, director at London-based Lodestone Mortgages, a broker, said: “We are starting to see lenders widen their margins on tracker products as demand for them increases. Some of that is understandable, as lenders are pricing for product flexibility and the additional risk that comes with a variable rate product. But some of it does look like pricing based on popularity, which is a different thing entirely.
“What concerns me more, though, is an inconsistency I am seeing with certain lenders when it comes to early repayment charges (ERCs). Some are offering ERC-free tracker mortgages to new customers, while existing customers choosing the same product are subject to ERCs.
“That is a difficult position to justify and borrowers should be aware that loyalty is not always rewarded in this market. Taking independent advice before committing to any product has never been more important.”
But Aaron Strutt, product and communications director at London-based Trinity Financial, said all was not lost: “Some of the tracker rate margins have gone up, but there are still some decent trackers to choose from, especially if you have a larger deposit.
“Skipton has just announced rate increases to its residential base rate trackers, although lenders like Halifax still have two-year tracker rates starting from 3.96%.
“Looking at the prices of fixed rates at the moment, many borrowers will think variable rates look like a good bet, especially if they do not expect the Bank of England base rate to increase anytime soon, given the state of the UK economy and the current global turmoil.”