Monetary Policy Committee (MPC) decisions, regarding Bank Base Rate (BBR), have become somewhat predictable. Of course, recently – with the exception of that 25bps cut in August last year – the decision has been to keep the status quo, and the members of the committee have tended to be, if not unanimous in that decision, then certainly close to it.
March’s MPC meeting, on the face of it, appeared to be no different with members voting 8-1 in favour of keeping BBR at 0.25%. However when we look at the voting from a perspective that every move towards change starts with the vote of one member, then it’s possible we may be transitioning towards an upward movement in the BBR. For a start, the MPC highlights rising inflation and there is something of a suggestion – albeit rather soft – that this would be an incentive to act if it continues to move upwards.
Now, I’m not going to suggest that another four MPC members will also change their vote in April but, with many commentators now believing that last August’s rate cut was something of a knee-jerk reaction to the Brexit vote, and with economic activity appearing strong in the period since, we perhaps shouldn’t count out a move back up to 0.5% at some point during 2017. Only then might we truly be on the road to a more ‘normalised’ BBR – albeit one that is different from the pre-Credit Crunch ‘normal’.
Of course BBR plays a significant role in the mortgage market with many tracker products pegged to it, and some lucky customers have very attractive rates which mirror what is happening with the BBR. These customers will take some convincing that there is going to be any significant change in their mortgage costs, any time soon. Indeed, to them, every quarter of a per cent onto the rate feels like a small fortune.
Which brings us to second-charge interest rates. We have seen much greater competition between lenders, and therefore downward pressure on rates in recent times. But like the first-charge market, we are now seeing small incremental shavings of rates, the latest being a reduction from a 3.95% to 3.83% annual interest rate.
Now picture this – you’ve established your client has a tracker rate to die for, so you’re not going to mess with that. For the capital-raising they require, your attention turns to second-charge and, of course, you want to get the best interest rate you can for your client. So you hone in on a market-leading rate of 3.83%, which looks very attractive for the client’s top-up loan. But here’s the rub. You may be surprised to learn, that having identified a great pay rate of 3.83%, it is perfectly possible to see two master brokers offering exactly the same product, but one is over 1% more expensive (in terms of the APRC) than the other. How can this be?
There is now quite a divergence between master broker practitioners, when it comes to fee-charging. In this post-MCD environment some have moved to adopt fee structures more in keeping with the first-charge market, while others appear content to hold onto a business model that appears increasingly anachronistic.
The costs to the client of an adviser opting for one of these latter master brokers can be quite eye-watering. Intermediaries should certainly be cautious, in these days of MCOB-regulated second charges, when using a master broker whose product could be secured with a competitor on the same rate, terms, etc, but comes with much lower fees and was thus considerably cheaper for the client.
One would hope that an adviser had very good reason for doing this, because when you lay these deals side by side, and make the fee and cost comparison clear (APRC), then you would be hard-pressed to see why that choice had been made.
Interest rates are really important to customers, and the MPC with its BBR decision sets a steer, however advisers will know only too well that the headline rate on products can be rather different to true cost to the client, once fees are layered in. Even more so, specifically in our sector, when you add in the differing fees that are charged for the same product it is clear to see the difference in the APRC the client pays. Look beyond the headline rate, and focus on the APRC to see the true cost the clients.
Choice is good, as is competition, but you certainly don’t want to make the wrong one and end up with your client paying way over the odds. You wouldn’t really recommend a client to Master Broker B, when you knew you could get the same deal for 1% less APRC at Master Broker A, would you?
Steve Harness is commercial director of The Loans Engine
