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"The first lender to offer this product will make an absolute killing"

ended 08. July 2024

We have a new Government and now we need new thinking on mortgages, according to brokers. Brokers have said “borrowers are unknowingly crying out for” capped rate mortgages and that it's high time lenders brought them back. One said: “The first lender to offer this product will make an absolute killing."

Capped rate mortgages traditionally offer a unique advantage for borrowers, particularly those who are uncertain about the direction of interest rates. By providing a ceiling on rates, they offer the security of a fixed-rate mortgage with the potential benefits of variable rate reductions. This hybrid approach can be especially appealing in volatile economic climates, yet such products seem to be non-existent in today's market.

One broker said the reason for their absence is profit: “Lender fears over lost profits if rates drop would be the main reason they haven't re-introduced them, which is why all the lowest fixed rates are 5+ year deals. A capped rate in theory would be a brilliant for clients, but no lender is going to stick their neck on the line to price this up as it would need to be expensive to start with to guarantee them a profit margin.”

But another went further. According to Craig Fish: "In fact the lack of innovation and very slight rate tweaks here and there reeks of collusion by lenders to drive consumer choice in their own favour purely for profit. The consumer is no longer the most important part of the equation, and this needs to change."

The views of brokers are below.

13 responses from the Newspage community

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Ranald Mitchell
Director at bad credit mortgage specialists Charwin Mortgages
We have a new government, now we need new mortgage products. In the past decade, low rates meant lenders didn’t need to innovate. Now, with economic shifts, the market is crying out for creativity. Imagine a capped-rate mortgage with a ceiling and a well-priced variable element: it would be a game-changer, swamping any lender with eager applicants. Consumers need security and flexibility, and this is the perfect solution. Additionally, “fix to track” or “track to fix” options would thrive, offering mid-term switches and adapting to customer needs. It’s time for lenders to seize this opportunity and revolutionise the market with innovative mortgage products.
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Ben Perks
Managing Director at Orchard Financial Advisers
The first lender to offer this product will make an absolute killing. In the conversations I’m having, more and more borrowers are unknowingly crying out for a capped rate mortgage product. They are asking for everything capped rates offer but without the name. Product innovation is always welcome, but so is the recycling of good ideas and, as we settle into the new norm of higher rates, we need some of the broader thinking of years gone by.
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Craig Fish
Director at Lodestone Mortgages
In a period when rates are low, and are clearly going nowhere, the only product a customer wants is the lowest fixed rate, but in times of uncertainty and possible ups and downs, innovation is crucial to keep the market flowing. Whilst capped is an option, it seems rates are only going to travel in one direction so a better option would be a collared mortgage. Lenders have got lazy, not only with service but also product choice. In fact the lack of innovation and very slight rate tweaks here and there reeks of collusion by lenders to drive consumer choice in their own favour purely for profit. The consumer is no longer the most important part of the equation, and this needs to change.
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Harps Garcha
Director at Brooklyns Financial
As we leave the era of rock-bottom interest rates, lenders have a golden chance to get creative. Product innovation has been pretty much non-existent lately. Introducing capped rates could really shake things up in the mortgage industry. And if lenders took it a step further and brought back offset and flexible mortgages, which were all the rage before low rates took over, that would be a real game changer. The big question now is: will any lenders have the courage to shake up the mortgage market?
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Samuel Mather-Holgate
Independent Financial Adviser at Mather and Murray Financial
The mortgage market is crying out for innovation, and while reintroducing old products isn’t the most ideal definition of this, anything that increases the product range is. Cap and collar mortgages, flexi-mortgages and even 100% mortgages would be welcomed back to the market now that strict affordability tests are in place.
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Justin Moy
Managing Director at EHF Mortgages
There are plenty of old-style mortgage products that would be perfect for the current economic climate. With fixed rates starting to fall again, lenders don't want to be setting up task forces to deal with volumes of re-priced Product Transfer instructions, as well as the normal pipeline of new business. Capped rates provide a ceiling on payments but keep all the benefits of falling rates, reducing the administration wastage, too. Lenders were able to price these products over 30. years ago, and it's now time to re-introduce such options to the market.
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David Stirling
Independent Financial Advisor at Mint Wealth
Lender fears over lost profits if rates drop would be the main reason they haven't re-introduced them, which is why all the lowest fixed rates are 5+ year deals. A capped rate in theory would be a brilliant for clients, but no lender is going to stick their neck on the line to price this up as it would need to be expensive to start with to guarantee them a profit margin. A quick look at tracker rates offered currently indicate no appetite from the banks for any form of variable rate.
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Dariusz Karpowicz
Director at Albion Financial Advice
Most customers really only have a choice between fixed and tracker mortgages, and most opt for fixed. Offset mortgages are very rare, so reintroducing capped mortgages would be very beneficial and worth considering in current times. Capped rate mortgages offer the security of a fixed rate with the potential benefits of variable rate reductions, which is appealing in a volatile economic climate. They should be reintroduced as soon as possible, but will lenders go for it? I doubt it, as it's probably less profitable for them. Any major lender offering decent pricing on capped rates would surely see a surge in applications. However, economic conditions, regulatory changes and risk management considerations may influence their decisions. Let's hope some forward-thinking lenders see the potential and bring them back.
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Stephen Perkins
Managing Director at Yellow Brick Mortgages
Capped rates give the best of both worlds to borrowers, but provide a potential liability or risk to lenders. While lenders should be confident that rates have peaked and therefore the chances of rates going above an offered cap and them being out of pocket are minimal, the same lenders cannot give brokers 24 hours notice of rate changes citing tight margins as justification. No doubt any lender offering a capped rate would gain traction from it, but they would sooner offer borrowers a fixed rate and look to benefit from rates falling.
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Rohit Kohli
Director at The Mortgage Stop
It’s very surprising that capped and collar products haven’t already come back in any meaningful way. They would offer borrowers more choice, especially as we move into a rate reduction environment. I guess it comes back to profit and offering fixed rates and overpriced trackers are more profitable for lenders.
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Simon Bridgland
Director at Charwin Private Clients
With one or two base rate drops likely in this second half of the year, a capped rate mortgage would seem sensible for borrowers. However, lenders seem reluctant to offer these deals of old as they would represent a higher cost to them at a time when they are trying to rein in costs and risk stemming from the extra regulatory burden enforced on lenders over the time since capped rates were last available. Capped deals could be made available but I think they would only gather dust rather than traction with borrowers as the headline rate would make them unattractive to borrowers only just coming to terms with a new world of higher rates.
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Ken James
Director at Contractor Mortgage Services
Innovation from lenders is coming back slowly with long-term fixed rates, switch and fix products and other variations on a theme, but compared to when I first came into financial services back in the late 90s, it was a much richer environment: capped and collared, variable, fixed, trackers and endowment mortgage options. A few decades ago, borrowers were littered with choice. However, while this may sound a good thing, I do feel that too much choice can be a bad thing for everyone as we saw with miselling and lenders struggling to meet endowmnent values. If lenders are to start offering a more varied and wider selection of choice such as the capped mortgages then they will undoubtably want to have the collar on this to reduce their profit margins from totally falling through the floor. Let's see if, with a new Government, we also start to see more innovation from lenders. Lenders do not have to reinvent the wheel but an upgrade wouldn't go amiss.
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Scott Taylor-Barr
Principal Adviser at Barnsdale Financial Management
A capped rate is, on the face of it, something of the ideal product. You get all the benefits of base rate reductions but with the security of knowing it would never go above a certain figure. So why did they disappear from the market in the first place? The answer is in product pricing; as the issue became that the cap needed to be set at quite a high level, meaning many fixed rates undercut it by a large margin, so the borrower needed to be confident that base rate was going to drop significantly and stay low for a prolonged period for the deal to work out better than the fixed rate, and in most cases that calculation simply didn't make sense to the majority of borrowers, who would rather have the certainty of the initially lower cost fixed rate.