John Charcol Monthly Mortgage Index

The John Charcol Mortgage Index is published monthly, tracking three important statistics, based on mortgage business written by John Charcol.  The index is a leading indicator of trends being based on mortgage applications submitted to lenders, whereas figures reported by the Council of Mortgage Lenders (CML) and the Bank of England (BofE) are based on completions, which typically take place 2-3 months after the mortgage application is submitted.

The three statistics tracked each month are the percentage split:

• Between Fixed rates, Capped rates and Tracker/Discount rates*.
• Between Purchases and Remortgages.
• Of First Time Buyers compared to all Purchasers.

Variable rate mortgages accounted for more than four in every five (80.9%) home loans arranged by John Charcol in the last month of 2009.  The John Charcol Index revealed that the proportion of fixed rates has fallen below 20% for the first time since August 2008.

Trackers are the product of choice for most
Whilst the split between variable and fixed, at face value, seems dramatic, it is really no surprise as it is absolutely our belief that the best value lies in tracker rates at present.  With the average difference between the best fixed rates and the initial rate on the best trackers around 1.5% in favour of trackers, it will currently take a substantial rise in bank rate for a borrower who takes a tracker to be worse off than one who opts for a fixed rate.

Of course, some people always prefer the security and comfort that a fixed rate naturally brings, but in the current market you really do need to question whether you are paying over the odds for that security. Generic advice on whether to take a fixed often simplistically states that if you cannot afford a rise in rates then you should take a fixed rate.  If rates for both fixed and variable are at the same level then clearly that is a no-brainer, but when there is a gap as wide as in today’s market being generic can easily be misleading.

If a borrower cannot afford a rise in a tracker rate then they cannot afford a fixed rate…
The key questions are how much rates are likely to rise in the period for which one is considering a fixed rate and what if there is a bigger increase.  For example a two year fix only buys security of payments for a very short period, although it does have the benefit that one is only locked in with early repayment charges for 2 years. Anyone buying a 2 year fix will revert to a variable rate after the 2 years, by which time the risk of rate increases will be greater. Not only have they only bought security for a short period but they have paid a fairly high price for it when it is probably least needed.

Furthermore if rates were to rise within the 2 years the cost of re-fixing in 2 years time will almost certainly be higher.  Therefore, although we believe trackers offer significantly better value at present for most borrowers those who want, or need, security of payments should fix for longer, say 5 years. The initial price differential with a tracker will be even greater at about 2.5%, but at least the objective of buying security of payments will have been achieved for a reasonable period.

A point we make to our clients is that it is vital we understand their whole picture before making a recommendation.  As mentioned above taking a fixed rate because you cannot afford a rise in interest rates are somewhat of an oxymoron when tracker rates are priced 1.5% lower.  What someone cannot afford is for rates to actually go above the level of the fixed rate.  It really highlights that good advice and an understanding of what is likely to influence future interest rate movements is key to getting the most appropriate mortgage.  With so many things to consider, seeking good quality independent mortgage advice has arguably never been more important, especially for the large majority who do not follow the market.”

So when to fix…
When the appropriate time will be is the million dollar question but with Bank Rate likely to stay very low, say not above 2.5%, for quite some time, and the cost of fixed rate mortgages still falling, it is not yet.  Despite December’s unexpectedly large rise in the inflation numbers most economists expect the Consumer Price Index to fall back below 2% by next year, even without a significant increase in interest rates, and the Bank of England takes a 2 year view on inflation.  A key part of our service will be to advise our clients when we think they should switch. In the short term the main risk on interest rates is political and so following the opinion polls in the run up to the election will be very relevant to forming a view on interest rates.

The fixed/capped/tracker split is heavily influenced by the advice given by John Charcol and it is to be expected that the swings between fixed and variable rates will be much greater than the figures from sources such as CML and BofE.  Their statistics are made up of a mixture of advised and non advised sales and the advice offered by different brokers and lenders will vary.

Definition of First Time Buyers
The percentage of the purchase market taken by FTBs varies depending on definition.  The Council of Mortgage Lenders treats any purchaser who is not simultaneously selling a property as being a FTB. This means that, for example, anyone who is returning to the property market after renting for a period or after a spell working as an expat will be treated as a FTB, as will someone acquiring a second property. As a result the CML estimates that it overstates the number of FTBs by about 25%, although their method of calculation is consistent and so its figures still provide a good indication of trends.

At one time many lenders offered some additional, and usually cheaper, mortgages for FTBs to choose from and lenders’ definition of a FTB varied. A few lenders still offer special FTB mortgages but most don’t and so there is now less reason for borrowers to want to be classified as FTBs in marginal cases in order to qualify for a particular mortgage deal. At John Charcol only genuine FTBs are classified as such but there are situations where it is possible to argue as to whether or not a purchaser is a FTB. The most obvious is where a couple are buying and one is a genuine FTB, but the other either currently or previously owned a property. In this situation John Charcol would not normally classify the purchasers as FTBs, with the possible exception being where the actual FTB is the sole or principal earner.