Grabbing headlines for the sake of it?

I've been away to Devon and Cornwall for the last week and have not been able to input these little nuggets of golden information in my absence.

As ever, the mortgage marketplace moves ahead without any time to draw breathe.

We were informed recently of a new product launched by HSBC called ‘Rate Matcher’, which one mortgage magazine presented with the eye-catching headline: ‘HSBC may deliver hammer blow to brokers’. HSBC are presenting this product to customers who are coming off fixed rate products this year and face the prospect of a hike in rates when they come to re-mortgage. By dealing with HSBC direct and switching to the Rate Matcher, the bank promises to match their old rate.

Given the market conditions, I would not be surprised to see other propositions like this enter the market. However, in a period of high inter-banking lending (LIBOR) rates and a worldwide lack of liquidity, these offers do not seem to make much economic sense – and as ever a more detailed examination proves to be revealing.

The facts behind the offer paint a slightly different picture:

1. Rate Matcher is limited to a £250K maximum loan, with a maximum of 80% of the property value– if you want more you have to top it up with another product from the Bank.

2. The minimum rate HSBC is accepting is 4.54% over two years.

3. There is the possibility of a large arrangement fee on the Rate Matcher product. HSBC are claiming that around three-quarters of clients will pay £999; however, the actual figure is based on interest rate and loan size and could be much higher. In their own example on their website, for a £125,000 loan with an interest rate of 4.89%, the arrangement fee is £1,119. Nowadays, £125,000 is much less than the typical average loan.

4. The Rate Matcher offer is only available until 18th May 2008, which is the deadline for fully competed applications to be made, which suggests its primary function is to grab the headlines (which it has been pretty successful at!).

5. The Rate Matcher offer is only available on 2 year fixed rate products, and not on HSBC’s Tracker, HomeStart, Buy to Let or Mortgage Specials. (Not everyone wants a fixed rate product, especially when interest rates are coming down.)

Looking at it objectively, I can’t imagine that other lenders will simply sit back and let HSBC pinch all of their clients! A move such as this by one of the big High Street brands might be the start of serious competition amongst the lenders once again.

Staying with the mortgage market, there is a serious issue currently facing the industry: the increase in lending rates from lenders at a time when the Bank of England is actually reducing interest rates (a further quarter per cent rate cut was announced on the 10th April).

Lenders rates are rising because of the increasing cost of inter-bank lending, reflected in the LIBOR (London Inter-Bank Offer Rate) rate. It is the LIBOR rate, rather than the headline Bank of England rate, that is the driving factor behind lenders’ rates on their products. We’re now in the midst of a liquidity crisis where the cost of inter-bank lending has risen significantly. This had its most publicised impact on Northern Rock at the end of 2007, but it is now affecting all of the banking sector.

Whilst any reduction in the interest rate by the Bank of England hits the headlines, it is changes in the LIBOR rate that affect the mortgage market. Therefore, the only clients who would see a reduction in their mortgage rate are those with Tracker products directly linked to the Bank of England base rate – and the majority of Tracker products are actually linked to the LIBOR rate. Thus we are seeing a situation where the Bank of England is cutting rates but borrowers are facing higher rates, even on some Tracker products. This is an important point for borrowers to understand.

With so much happening in the mortgage market at the moment, and the heightened level of media interest, there is no doubt that there will be further ‘shock announcements’ such as this over the coming weeks. My aim, as an Independent Mortgage Adviser, is to look beyond the headlines and present my clients with a more balanced view of the market with the benefit of my experience. There’s no question that this is a tough period, but one thing is for certain – clients need the help of their advisers now, more than ever. Far from being a ‘hammer blow to brokers’, the months ahead could well establish the dominant role of the mortgage adviser in the market.

As ever, I'm here, willing and available to offer any one looking for advice for their residential or business mortgage, with a personal service, and help them achieve their own goals and ambitions. The contact link is on the right hand side of this post!