Why are Trackers so high?

opinions4u

kriss_boy wrote: »

In 2008 I got a tracker thats only 0.5% above the BoE. But right now the best Lloyds can offer is around 4% above the BoE. Why so high?

The Credit Crunch. Funds became scarce and the price went up. So you pay more.

Arent we all in agreement that the BoE will rise to 5/6% again in the forseable future- making these trackers push up to 10% mark. Why would anyone agree to that? Or is there sufficient cause to believe that long term, 10/15 years, the BoE will remain really, really low?

I wouldn't begin to predict medium term. Short term they will stay low. Google "Japanese Interest Rates" to understand that rates are not guaranteed to go back to where they were (although you should budget for it).

How did some of us manage to get such a low tracker, 0.5%, when the housing market was so strong?

High supply of funds, a very competitive mortgage market, a strong housing market and a perceived low risk of borrowers defaulting. None of these factors are around today.

Couldnt they just put you on 10% or 15% if they want? Or is there a logical reason as to why their SVR once the fix ends will be reasonable.

Potentially they could move the SVR up, and some do. But competitive pressures keep those rates lower. After all, do they want to lose all their lower LTV customers to other lenders? I don't think so.

daveyjp wrote: »

There's no reason why a base rate tracker at 1-2% above BOE rate couldn't make money for the banks - they are still borrowing at less than 1%

Utter tosh. Longer term wholesale mortgage funding is not raised at less than 1%. Easy access savings accounts are paying up to 2.9% and fixed term accounts cost up to 4.75%.

but they have lots of bad debts on the horizon so need as much cash as possible to cover these debts.

Bad debts are actually falling. But you're right on this part of your post. Mortgage rate = cost of funds + cost of admin + anticipated cost of bad debt + return for shareholders.

kriss_boy

daveyjp wrote: »

There's no reason why a base rate tracker at 1-2% above BOE rate couldn't make money for the banks - they are still borrowing at less than 1%, but they have lots of bad debts on the horizon so need as much cash as possible to cover these debts.

So do you think most people would agree that a tracker 4/5% above the BoE is just asking for trouble?

Hypothetically if you accept a 5 year fix at, say, 4% then after the 5 years dont you have to pay exit fees to leave that lender to find another fixed term?

Can you keep fixing every 5 years to keep a lowish rate?

originalmiscellany

kriss_boy wrote: »

So do you think most people would agree that a tracker 4/5% above the BoE is just asking for trouble?

Hypothetically if you accept a 5 year fix at, say, 4% then after the 5 years dont you have to pay exit fees to leave that lender to find another fixed term?

Can you keep fixing every 5 years to keep a lowish rate?

a) 4 or 5% is asking for trouble - you're gambling on interest rates staying low, and they won't forever (they might for some time though) - if interest rates go up to historically low rates - 5%, you're looking at 10% interest rates which would really hurt you.

b) Most of the time no, you have a contract with them for a set time frame, after the time frame, you will often be able to remortgage for free, although it'll be in the small print and needs to be factored in, depending on the overall interest rate.

c) You can fix as often as you want - if you really want you could get a one year fix for every year of your mortgage, but that would be silly!

1) Our first mortgage was a 5 year fixed at 3.99% from 2003-2008. At the end of that time frame, we decided to change to a 2 year tracker, and now we've moved to an offset, with the option to change to a fixed should rates rocket.

Hope it helps?

dunstonh

So do you think most people would agree that a tracker 4/5% above the BoE is just asking for trouble?

If its only for a 1 or 2 years at max and then drops to SVR or base plus 1% or similar then you may get away with it. Or if there is a penalty free exit allowed.

Can you keep fixing every 5 years to keep a lowish rate?

No. You can apply for fixed rates every 5 years but there is no guarantee that the fixed rate offered at that time will be low by historic standards. The long term average rate is around 7.5% p.a. I remember fixed rate mortgages at 11-12% p.a.

There's no reason why a base rate tracker at 1-2% above BOE rate couldn't make money for the banks - they are still borrowing at less than 1%, but they have lots of bad debts on the horizon so need as much cash as possible to cover these debts.

I suggest you read up on how banks finance mortgages and other borrowing. Its not as simple as that. Lets take a bank that is using a tranche of savers money from fixed term deposits offer 4% p.a. How can the lender than offer a rate less than 4% on that money? What if they issue a bond? Bonds are pricing in default rates at levels never seen before during any previous recession. They are still higher than that of the great depression. This is pushing the cost of borrowing up for them. The wholesale rates are not reflective of the base rate. You also have the costs of anticipated defaults at consumer level. They have to price in failures there as well.

daveyjp

kriss_boy wrote: »

So do you think most people would agree that a tracker 4/5% above the BoE is just asking for trouble?

Hypothetically if you accept a 5 year fix at, say, 4% then after the 5 years dont you have to pay exit fees to leave that lender to find another fixed term?

Can you keep fixing every 5 years to keep a lowish rate?

4-5% over 5 years it could be, inflation is the elephant in the room and it will need controlling - raising interest rates is one of the few levers left.

Exit fees depend on the deal you sign - knowing the banks current attitude they'll want compensation if you don't go onto SVR.

There are always fixed rates about, but it ties in with exit fees.

As for tosh about what could be offered that response it tosh.

A few years ago Abbey were offering a lifetime flexible tracker mortgage at 0.75% above base (base was at 4%) with no application fee, exit fee or minimum tie in period - savings rates of 7-8% were available - so it can be done.

opinions4u

daveyjp wrote: »

A few years ago Abbey were offering a lifetime flexible tracker mortgage at 0.75% above base (base was at 4%) with no application fee, exit fee or minimum tie in period - savings rates of 7-8% were available - so it can be done.

Abbey were known for putting the big savings rate in the window and then, once you get inside, telling you that you need to match the sum saved with an overprice, poor performing investment plan too - which cross-subsidised the savings account. Additionally, repeating a point I made above, wholesale funding is significantly more expensive (and scarcer) now that it has been in the past.

Put simply, if banks were flogging trackers at BofE plus 0.75% in today's environment they'd go bust.

dunstonh

There are always fixed rates about, but it ties in with exit fees.

During the 90s there were periods where there were no fixed rate deals available. It typically happens during financial crisis (which occur more often than people realise - on average every 7 years. There have been 8 since 1956).

A few years ago Abbey were offering a lifetime flexible tracker mortgage at 0.75% above base (base was at 4%) with no application fee, exit fee or minimum tie in period - savings rates of 7-8% were available - so it can be done.

Thats because LIBOR was cheaper and issuing bonds was easier. They could obtain cheap money then.

casper_g

Inflation is an important word to remember. No bank could afford to lend at base rate + 1 or 2% when base rate is 0.5% and inflation is over 3% - the money they loaned out would be be decreasing in value constantly....

dwsjarcmcd

The model for lenders has changed since the credit crunch and because of new rules around retained capital requirements. Previously lenders made very little margin during the benefit period i.e. fixed rate and often a loss. Profits came from cross sales activity (life assurance, home insurance) which is at massive margins and from subsequent marketing activity to their customer base. Those who stayed on SVR at the end were effectively the profit generators for lenders.

Today it is different, with a lack of both demand and reduced competition, as well as increased provisioning mortgages need to turn in a profit from day 1, and as has been pointed out, they need to raise retail savings to allow them to lend these out. Also, it is getting more difficult for them to sell, and particularly retain their general insurance book as customers become more aware of the prices they charge and how easy it is to switch insurers.

Will it return to pre-crash conditions, personally I doubt it for the foreseeable future but I do think lenders will have to cut their margins when interest rates increase.

Gorgeous_George

If I was the lender, I'd offer a tracker at BofE base rate + 1.5% - but with a collar/floor at between 3% and 5% (depending on LTV). I'm sure this would be attractive to many borrowers and would give some protection to the lender whilst also allowing decent rates for savers.

I think the fact that lenders are offering trackers at 4%/5% above base rate indicates that they do not expect base rates to rise significantly over the term of the fix.

GG