News Review: Housing


Mortgage sleepwalkers missing a trick by


by Stephen Smith, director of housing and public affairs, Legal & General


it’s funny how when the credit crunch first struck, everyone instantly became an expert on the economy. interest rates, inflation and quantitative easing suddenly became legitimate topics of conversation at dinner parties and pubs up and down the country, and not just among people working in finance. the ins and outs of the monetary Policy committee’s monthly meetings suddenly meant something to ordinary folk desperate to guage what impact mervyn King et al might have on their own day- to-day finances. it’s now been 31 months


since the Bank of england base rate was first cut to an all-time low of 0.5%. two and a half years. and a lot has changed since then; the economy has improved slightly from -2.2% (Q1 2009) to 0.2% (Q2 2011). But we’ve seen inflation shoot up from 2.9% in march 2009 to 4.4% today and unemployment rise from 2.03m in January 2009 to 2.51m in July 2011. We also have a coalition government, which is driving forward the conservative Party’s plan to restore economic health to the uK by slashing public spending.


Apathy endemic People have changed too. they are spending and saving differently. they are holidaying in cornwall not in cambodia. they are using


vouchers to pay for cinema tickets and pizza restaurants.. they are opting for economy rather than organic products at the supermarket. While these new habits


are largely being driven by a genuine concern for household finances, most people are still worryingly apathetic when it comes to major money issues - like mortgages. their interest in the base rate has waned, which isn’t really a surprise. Let’s be honest, 31 months of “no change” is about as thrilling as reading the back of a cereal box. could this indifference be


behind the large numbers of “mortgage sleep walkers” we’re seeing – in short, people who are drifting along on their lenders’ standard variable rates without even checking whether they could get a better deal elsewhere? it might even be to blame for the fact that, contrary to popular belief, households are not taking advantage of rock-bottom interest rates by making overpayments on their mortgages.


Winners i often see articles looking at the winners and losers of low interest rates; while life is rarely as black and white as this, it is fair to say that anyone with a mortgage could be benefitting from the 0.5% base rate. call me an optimist but i think there is good news out there for homeowners and i think more brokers should be getting in touch with their clients and telling them about it. earlier this year, the view from the city was that


10 mortgage introducer OCTOBER 2011


an interest rate rise was imminent, especially in light of better economic news. But now it looks like the mPc will hold the official rate of interest at 0.5%, potentially for another two years. i wouldn’t be surprised if the big question of when rates will rise is still being debated when King steps down as governor of the Bank of england in the summer of 2013.


“31 months of no change is about as thrilling as reading the back of a cereal box. Could this indifference be behind the large numbers of mortgage sleep walkers we’re seeing?”


the global economy is increasingly volatile as several eurozone countries teeter on the brink of defaulting. as a result, the european central Bank is expected to cut rates, a u-turn from the rises it made earlier this year. Ben Bernanke, head of the uS Federal reserve, recently predicted that interest rates in the uS will remain low until at least mid-2013.


Inflation spectre in the uK, inflation is still way above the Bank’s own target of 2% and the consumer Prices index is predicted to peak at around 5% on the back of energy bill hikes. But the minutes from august’s mPc meeting show that its members expect inflation to fall below the target in the medium term. the biggest risk of high inflation is that this becomes embedded in wages. However, all the evidence suggests that the sluggish economy and public sector cuts mean this isn’t happening. as a result, the decision to maintain the base rate at 0.5% in both august and September was unanimous. at a time when bad news


is seldom absent from the front pages, there is now a rare but valuable opportunity to be able to point out the positives to your existing clients. Yes, lending criteria is tougher than in the past and loan to values are higher, but for those people who qualify for a mortgage it is now a lot cheaper to borrow than it was 31 months ago.


Pick up the phone Higher LtVs are coming to market and rates have dropped. Yet 46% of borrowers haven’t reviewed their loans since the base rate last moved, according to unbiased.co.uk. it’s time for brokers to start talking to customers about their options and the benefits of acting sooner rather than later. once rates do start to rise, mortgage costs will quickly follow.


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