The days of self-certification and 100 per cent buy-to-let home loans are long gone, but there is renewed innovation and even – dare I say – competition in the UK mortgage market.
Last week, for example, we had First Direct lowering its mortgage arrangement fees to just £99; which compares remarkably favourably to an industry average of nearly £1,000. The unprecedented rise in arrangement and other mortgage fees has been a quiet scandal rumbling on for the past few years. Basically, mortgage fees have nothing to do with the cost of arranging or managing a mortgage – and why should lenders charge anyway? Surely their reward is the interest they gather on the loan? It's a plain old anti-competitive ruse set up to discourage switching providers.
Now it would be great if First Direct's move bust this cartel operation by the mortgage industry. But it won't manage this on its own because it has a tiny customer base and cherry picks the very best borrowers – loan-to-value ratios of 65 to 75 per cent are a major barrier for most. What's more, First Direct doesn't deal with brokers so most consumers looking for a mortgage won't even see its products.
On the brokerage side, there is a bit of innovation going on, too. On Friday, John Charcol launched its interest-rate protector – which sounds a bit like the most rubbish superhero imaginable. The protector does exactly what it says on the cape and allows you to purchase what is, in effect, insurance, in case interest rates rise. You select what rate you want a cap to kick in at, and for how long. The lower the rate the cap kicks in at, and the longer the policy lasts, the more it costs. It can work out a lot cheaper than, say, remortgaging to a fixed-rate deal – particularly with those punishing arrangement fees. Best suited are those on low variable-rate mortgages, perhaps pegged to the Bank of England base rate. If they are paying, say, 1 per cent, but want the surety of a fixed-rate deal, they would have to swallow a quadruple increase in mortgage costs to get it. Purchasing one of these caps looks like a much lower-cost alternative.
Paradigm or waste of time?
Don't you just love financial jargon? I am being sarcastic, of course. But if I was to ask you what you think when hearing the phrase "absolute return funds" you could be forgiven for saying that sounded a safe investment, sure to grow your cash pile even in a market downturn.
Heavily marketed, absolute returns have proved a hit with investors. In terms of money flowing into them the absolute returns sector has been near the top of the sales charts in 21 of the past 26 months. However, they are expensive to invest in, and the performance of most has been lamentable. Take Octopus UK Absolute Equity Fund. According to AWD Chase de Vere, it has lost nearly 20 per cent this year alone, despite its mission statement, "to deliver a positive return in all stock-market conditions". Overall, more absolute return funds are losing, rather than making, money and last year when we had a remarkable growth in the stock market they massively underperformed.
The proponents of absolute return funds – marketing managers, mostly – say that the idea is not to run alongside, for example, the FTSE, but to grow steadily by using complex financial strategies such as hedging, and in some cases holding a diverse range of assets. They also say it's too soon to make decisions on this sector, which has only been going a couple of years.
But this has been an extraordinary couple of years on the markets; we have had swings which you would normally see only over a decade, with banking and government debt crises. This has been a fantastic opportunity for absolute returns managers – a proving ground like no other, and most have been found wanting. In short, it's not too soon to start drawing conclusions about absolute return funds and I'm afraid, like all other new paradigms of investment before them, they are looking like a bit of a waste of money.