Ultra-low mortgage rates distract from longevity of debt, brokers warn

Ultra-low mortgage rates distract from longevity of debt, brokers warn

Experts and advisers have warned borrowers of the risks that come with lenders “luring” them into mortgages at rates as low as 0.79 per cent.

Banks such as the Co-Op, First Direct, and Nationwide are lending at some of their cheapest rates ever to investors and homeowners.

These rates have, in turn, helped to prop up property transaction figures. In August purchases rose 32 per cent to 98,300, according to HMRC data.

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But some are concerned that “ultra-low” rates are encouraging borrowers to make quick decisions which don’t take into account the full term of a mortgage.

Lewis Shaw, founder of Mansfield-based mortgage broker Shaw Financial Services, told FTAdviser: “What may be happening is that people are opting for headline deals because they get lured into thinking it's all about the rate, when in fact most of these ultra-low deals have high fees and tend to be 2-year fixes. 

“Secondly, there could be an overstretching in terms of people borrowing more than they really would be comfortable with.

“People only tend to see the immediate cost and not what that could mean in 2,3 5 or ten years' time. It's that age-old perception problem of both, all we see is all there is and overestimating the positives and not paying attention to possible negatives.”

Headline rates don't affect affordability tests, which require banks to stress test each mortgage they lend on using a future rate.

Since 2014, only 15 per cent of loans on a UK bank’s balance sheet can be above a 4.5 per cent loan-to-income ratio.

But Shaw’s concern is that headline rates are “distracting” borrowers from the longevity of the debt they’re entering into.

“It's always important to not get swayed into focusing on rate all the time, but instead take a more holistic look at your circumstances and get advice from a mortgage professional.”

Dominik Lipnicki, director at Your Mortgage Decisions, agreed that "unsurprisingly" record low rates "can pose risk further down the road if rates increase".

He continued: "Responsible advisors will have those conversations with potential borrowers to ensure that adequate stress testing is in place. Many borrowers do not remember a world with interest rates of more than 5 per cent.

"Whilst many would argue that those days are behind us for good, we can already see some putting pressure on the Bank of England to increase their base rate to combat the recent inflation growth."

'Chasing rates is dangerous'

Sarah Green, head of customer acquisition at Virgin Money, told FTAdviser banks go through cycles of chasing rates. But she said “banks need to remain stable and sensible in these times and not chase rates for the sake of it”.

“Our aim is to grow tactically,” Green explained. “Products brokers offer shouldn’t just be based on rates, because chasing rates is dangerous.”

Green cited the portability of mortgage products as lives change, suggesting customers “don’t understand” the significance of this enough when taking out a mortgage. “We should be chasing products which suit them [our customers] in the future,” she concluded.