Borrowers experiencing confusion over rate movements

Interest rate movements on mortgage products seem to have gone insane lately, with the Bank of England reducing the base rate, some lenders totally ignoring the base rate movement and hiking up their rates, other lenders reducing their rates in order to attract more custom, and some lenders even reducing rates and then putting them back up again within a matter of days.

The global credit crunch has certainly had an impact on the mortgage market, but for some consumers it is difficult to tell what is going to happen with mortgage interest rates.

In the past couple of weeks consumers had their hopes raised after a number of lenders decided to reduce their interest rates on a number of mortgage products. There were reports that perhaps the effects of the global credit crunch were easing up at last, with lenders including the Abbey and the Nationwide Building Society cutting their interest rates on a number of mortgage products. Around the same time, one lender, First Direct, which had withdrawn mortgage products from new customers just a few weeks earlier, announced its re-entry into the mortgage market for new customers.

Unsurprisingly all of this news was welcomed by consumers and industry officials, who hoped that it was a sign up things to come, and that the mortgage markets may at least be easing up.

After the decision of First Direct to re-enter the mortgage lending sector for new customers one industry official stated: ‘This is welcome news in an otherwise hostile market place. First Direct’s original stance - made at the start of April - was reflective of a cautious attitude towards the market as a whole. The reversal of the decision demonstrates a growing confidence in the market. The news that First Direct is reopening its doors comes hot on the heels of Abbey and Nationwide cutting mortgage rates last week and HSBC extending its rate matcher offer. The clouds over the mortgage market are starting to clear, much to the relief of borrowers across the country.’

However, the enthusiasm did not last long. One of the downsides to the situation is that many lenders have reduced their rates – but only for borrowers that are able to put down a hefty deposit, which rules out most first time buyers and those with low incomes who have little in the way of savings.

Worse still, just a week after reducing some of its mortgage rates, one bank, Spanish owned Abbey, has revealed that it has hiked up some interest rates again. Previously it had cut the rate on its five year fixed rate mortgage by 0.17%. However, it has now increased the rate on this mortgage by 0.44%.

Officials from the Abbey claimed that it was responding to a dramatic increase in interest rates swaps, and stated that they bank had kept interest rates on hold on a number of its mortgage products. One official from the bank added: “Because we cut rates last week, even with these increases our fixed rate deals are still competitive.”

However, campaigners and other industry officials have not reacted well to the Abbey’s decision to backtrack on its interest rate cuts.

One official said: “While swap rates have risen by around half a per cent in the past month which could justify this hike, Abbey is only adding to confusion and volatility by reducing rates on fixed deals last week only to raise them again this week.” She added: “Borrowers need to be regaining trust in providers and the housing market as a whole, or we will face the unwanted prospect of further market stagnation.”

Further confusion is being caused by some lenders offering lower interest rates on certain deals when they are taken direct than if they are taken through a broker. Many first time buyers tend to go through a broker for increased guidance when looking for a mortgage, and may not realise that they can get a better rate by going direct.

However, this problem may now be solved, as the Financial Services Authority has told brokers that they must make it clear to customers if they can get a better deal on a mortgage through another route, with one FDA official stating: “For example, if a customer goes to a whole of market intermediary, and the intermediary recognises that, in current market conditions, there may be more competitive products in the market other than those available to the intermediary, that may be of interest to the customer, we think that there must be acknowledgement of this.”

Confusion and difficulties relating to finding a suitable mortgage have increased over recent months, as the mortgage lending market has shrunk and lending criteria has continued to become tighter and more stringent.