Some predicted a mortgage price war after HSBC introduced a discount deal at 1.99 per cent last week, heading straight for the top of the best-buy tables. Although undoubtedly an eyecatching rate, will this really shake up the mortgage market?
"While the HSBC deals will be good news for some borrowers, there is so little competition in the market that it's unlikely that we'll see other lenders trying to match HSBC," says Richard Morea of broker London & Country.
The truth is that although HSBC's move is good news for some, it will actually benefit few people and is therefore a relatively empty indicator of recovery. For many people, whether first-time buyers or homeowners looking to remortgage, the market is still treacherous. Only buyers with at least a 40 per cent deposit are eligible for the new HSBC loan which comes with a rather hefty booking fee of £1,199 and is discounted from its Standard Variable Rate (SVR). A tracker mortgage reflects the movement of the base rate but lenders do have the option of increasing their SVR at any time.
"It's just a way for HSBC to grab some headlines and cherry-pick the customers they want," says Andrew Montlake, from broker Coreco. "I don't think it's a prelude to a mortgage rate war. If you look at their tactics over the past few months, they've come out with a rate, taken their fill and pulled it," he adds.
Experts are also questioning how well HSBC will manage demand if there's an influx of applicants. This could scupper homebuyers relying on getting finance in place quickly to secure a purchase. "Because of the volume, it's taking a long time to get mortgages out of them. There are concerns that property sales could fall through because of this," Mr Morea says.
With its high deposit, the HSBC loan, like the majority of any other low-rate deals on the market, is still well out of the reach of most first-time buyers. Even a 5 per cent difference in deposit has a huge effect on both the competitiveness and the number of loans available. RBS, for example, offers a rate of 3.69 per cent for a deal fixed until 31 October 2011, with an LTV(loan to value) of 75 per cent. For homebuyers with only an 80 per cent LTV, though, that rate shoots up to 5.39 per cent for the same fixed period. Many experts argue that without a more sensible approach to underwriting at higher LTVs, a full recovery is still a long way off.
"Borrowers looking to borrow a maximum of 75 per cent have seen improvements in the deals on offer, but those needing to borrow more will find their options limited and will pay a premium for the privilege," says Mr Morea.
While it remains clear that lending is tight for first-timers, there are some signs that things are picking up. The August housing market report from the National Association of Estate Agents revealed that although the number of sales decreased, there was a sharp increase in the number of first-time buyers from 22 per cent in July, to 63 per cent in August. There have been other indications that the mortgage lending market in general is slackening slightly; there are now more mortgage products on offer, lenders are making their best rates available up to 70 per cent LTV now, and, overall, there are more lenders open for business, albeit to elite borrowers. "They're still very strict on criteria, but they are out there saying they'd like a little more business," says Mr Montlake.
The question of whether to fix mortgage rates has been another contentious issue of late. Although in the first half of the year many people flocked towards fixed-rate deals after warnings that these would rise steeply, new borrowers are focusing on variable-rate loans, according to figures from John Charcol. The broker reported that the number of clients taking up variable-rate deals more than doubled from 16.9 per cent in June to 34.7 per cent in July – a result of rapidly increased fixed-rate costs and predictions that the Bank of England base rate is unlikely to rise in the near future.
However, lenders do face increased pressure to cut the cost of fixed-rate loans after steep falls in their own lending costs. Lower swap rates, upon which fixed-rate deals are based, encouraged both Woolwich and Cheltenham & Gloucester to make cuts last week. Woolwich, for example, reduced the rate on its two-year fixed mortgage by 0.2 per cent to 4.09 per cent. The loan is restricted to 70 per cent LTV. But there is no guarantee that other lenders will follow suit and with demand outstripping supply, lenders will still be reluctant to attract too much business.
Experts say that homeowners with a monthly budget flexible enough to withstand potential rate rises next year can afford to take a risk with the more attractive variable-rate offers. However, those concerned that a rise would jeopardise their ability to repay their loans are advised to consider fixing for security of knowing how much their monthly payments will be. "I've always felt that if you're on a tight budget, you should fix. Trying to second guess where rates are going is a pretty dangerous game to play," says Mark Harris, from broker Savills Private Finance.
Mr Harris advises against short-term fixes and urges homeowners to take the insurance of a long-term fix instead. "You've got to look at five years – it gives you time to plan. There's almost no point fixing for two. If you're going to take a short-term view I would be tempted to float on a tracker instead," he says.