Mortgages Uncovered

Britain’s mortgage lenders are calling upon the Bank of England to urgently launch a new initiative in the hope it will kick start the mortgage market.

Council of Mortgage Lenders (CML), say that the Special Liquidity Scheme which the Bank of England set up earlier this year to ease funding constraints on mortgage lenders, has just not been effective in attracting much needed investors back into the credit markets. The majority of investors fled from the UK market in the wake of the US sub-prime crisis.

Most mortgage lenders rely on credit markets to sell their mortgage packages, either via covered bonds or mortgage backed securities. This is the way lenders can raise funding to offer more mortgages to their new borrowers.

The lack of mortgage applications within the credit market now means that lenders are being circumspect with their lending. Interest rates have spiraled and new buyers are finding it extremely difficult to secure a new mortgage deal.

This has now dragging house prices down, as sellers are forced to cut their selling prices to secure a sale from the dwindling number of buyers. The number of house sales fell to its lowest level in over thirty years during June, according to the figures published recently by Royal Institution of Chartered Surveyors.

Under the outlined plans of the CML, the Bank of England would act as the back stop to credit markets by accepting the new issues of securities or bonds as collateral. Now, CML proposes that Bank of England would only agree to do this if securities had first been sold to another financial institution.

This arrangement means buyers could be found for the issues of new securities since they would have the guarantee that they could potentially pass the securities on to the Bank of England in return for more liquid funds, if they were to encounter difficulties.

This process is has been designed to create a liquid market in mortgage backed securities, which currently lenders are finding difficult to sell. The Bank of England’s principal role under the proposal is to offer assurance that the market for these securities and bonds will remain liquid and that they can be traded.

In the current financial climate, it’s easy to assume that the affordable mortgage has become a very rare species but there are still opportunities out there.

Whatever type of mortgage you want, start by checking your credit report.

As I’m sure you are away, items in your credit report with the details from your application, are used to calculate a credit score to determine whether you should receive an offer and how much interest you will pay, it makes good sense to ensure that everything is up to date, accurately reflecting your circumstances.

First-time buyers
For first time buyers, the 125% and 100% mortgages appear to be a thing of the past and right now on the market even 90%, 95% deals are hard to find. For many, the traditional 5% deposit just isn’t likely to be enough anymore.
So, before you speak to an IFA or proceed with a mortgage application you should consider:
• Making more savings through a high-interest account to build up a good deposit and take
advantage of falling house prices.
• Ensure your credit history is accurate. If you’ve had problems with credit in the past, work to improve your credit history. So from here on out, ensure you pay bills and credit card balances on time, don’t take out more credit and try and pay off any outstanding amounts. Register to vote, as this can count in your favour with lenders.
• Consider buying with another person or shared ownership. Apart from housing associations, some house builders offer this service and some may help you find a suitable mortgage through investigating the Open Market Home Buy scheme. Next year, the government will be offering a £1,5K grant to first time buyers under this very scheme though this offer is likely to only apply to key workers.

Remortgages:

For 1.4 million of us, 2008 is the year when our fixed-rate mortgage expires.

If you are one of these, improve your chances of getting an affordable replacement:

• Lenders, obviously particularly those offering attractive rates get swamped and because of this applications take longer to process, so begin the hunt for a replacement mortgage at least 3 months before your current deal expires.
• Look for a broker who will cover the entire mortgage market. Good brokers will hear about special offers and know about withdrawn products long before you can find out yourself- factor in transfer or application fees. Because of recent rises, you may find that you are better off staying with your current lender, even if the interest rate is higher than you can get elsewhere
• Pay off as much of your mortgage as you can before applying for the next. It goes without saying that the more equity you have, the better your chances of getting a good deal. The best offers are available only to people who do own at least 25% of their property.
• If for any reason you have skipped repayments in the past, contact the credit reference agency – Experian is the UK’s largest – and ask to add an explanation to the reasons why. E.g. you might have been ill or had an accident. Lenders will see this and there is a chance they could take it into consideration.

Obviously it depends upon on individual’s circumstances but generally speaking homeowners currently on Standard Variable Rate mortgages could benefit from switching to the Woolwich lifetime tracker mortgage.

The lifetime tracker mortgage comes with no product or arrangement fees and the deal is pretty much almost as easy to move to as a Standard Rate Variable, its lack of early repayment charges, ERCs make it just as easy to depart from.

Whilst the rate is variable it is also always tied to the Bank of England base rate which prevents arbitrary price increases.

This also means your mortgage will remain just as consistently competitive with any new deals on the market.

Is there a catch?
If you are a borrower with tight monthly budgets approach tracker mortgages with caution.
If the base rate does rise, anyone with a tracker mortgage probably will see monthly mortgage payments increase. So if you feel you could not cope with an increase in your mortgage payments, you will still be better off with a fixed rate mortgage deal where you see the rate stay level for a fixed period.

Not ALL versions of the lifetime tracker mortgage from Woolwich are as competitive as 5.89%. Peoples who need to borrow 80% / 90% of their property value will find cheaper short term tracker mortgages but probably with higher arrangement and product fees plus early repayment charges.

The Lifetime Tracker Mortgage is currently only available with the Woolwich and there are three types of lifetime tracker.

A huge advantage of all three lifetime trackers is the distinct lack of upfront fees.

The main thing that customers are asked to do is to pay for their property to be valued, however, no other fees are payable (I’m sure you will agree that particularly in the current climate this is very unusual!)

There is also a distinct absence of any ERC’s, early repayment charges, another extremely rare bonus in today’s market. It means that people taking out a lifetime tracker can either over pay or move their mortgage at any time they want without the penalties.

Maybe, more importantly, the lifetime tracker is a now the brand new market leader for anyone with either an equity or deposit of at least 40%. The cheapest 2yr fixed deal currently available (First Direct) is 0.10% more expensive and the mortgage comes with upfront fees over £2K, plus ERCs.
So, in terms of tracker mortgages Woolwich’s 5.89% deal is just piped to the post by Norwich & Peterborough Building Society’s base rate tracker which is at 5.75% and there’s comes with a fee of £999.

For most people, the additional charge on Norwich & Peterborough’s tracker plus the application of ERCs for three years does prove that Woolwich’s deal will be more appealing.

With current conditions in the UK mortgage market it’s not been often we have seen a glimmer of hope for homeowners.

After a huge decline in the amount of products now available, the soaring increases in interest rates and a jump in up front mortgage fees, most borrowers looked set to suffer throughout 2008.

However, a small glimmer of hope is what we saw last week. With a new type of mortgage deal on the market, it might just save some from years of mortgage hell.

Fixed Rate Mortgages
To find a cheap fixed rate mortgage right now is particularly difficult. Partly, this is due to lenders not reacting to the falls in swap rates. So swap rates for 2, 3 or 5 year fixes reached a peak in June although some lenders e.g. Halifax and NatWest continued to higher the cost of their fixed rate mortgages.

Now the average cost of a fixed rate mortgage looks prohibitive; 2 year fixed rate – average of 7.07%, 3 year fixed rate – average of 7.25%, 5 year fixed rate – average of 6.93%. Furthermore, fixed rate mortgages normally come with hefty arrangement fees especially in the case of borrowers who don’t have larger deposits.

Trackers
Right now, some of the cheapest deals on the market are tracker mortgages.

A tracker mortgage takes its name due to the fact it tracks the Bank of England base rate, which currently stands at 5%. Every time the base rate changes so will the rate of a tracker mortgage which also means lenders pass on any sort of base rate cut or rise. Normally, a tracker is only competitive for 2 or 3 years after which time it reverts to a more expensive rate. But here we are talking about a lifetime tracker.

These mortgage deals track the Bank of England base rate at a competitive distance over the entire life of the mortgage. Now, over the years, what this means is that these deals can save you many thousands of pounds, as you never need to pay huge fees to remortgage, ever, ever again!

From last week, Woolwich cut the cost of its lifetime trackers, throwing these deals into all the best buy mortgage tables and finally giving the mortgage market some much needed good news!

Industry figures last week showed that mortgage lending throughout the UK actually increased slightly during May, however, the amount of people remortgaging, which is the main stay of the mortgage market, fell very steeply.

The Council of Mortgage Lenders stated that the amount of new mortgages was 52,700 which showed a month on month rise of 4%. In comparison with May 2007, this figure was 44% lower, showing the slow down in the UK housing market over a 12 month period.

With a 14% decline in remortgaging loans to 71K in May 08, this showed a 23% drop on the year.
The Council of Mortgage Lenders Director General, Michael Coogan claims that as lending levels are lower than last year any recovery from this is certainly quite a way away with no sign of the special liquidity scheme boosting the flow of funds to the mortgage industry or lowering costs of funds as originally hoped.

This CML data is likely to further fuel concerns that the current weakness of the housing market could weigh heavily onto the wider economy. Warnings came last week from The British Chamber of Commerce that UK economy was facing a now very serious risk of recession; it further urged the Bank of England to resist the calls in interest rate rises curbing inflation.

The percentage of mortgages for people buying properties to either rent out or withdraw further equity from their homes does remain relatively strong at 29% in May 08.

The CML data also highlights that affordability of mortgages also appears to be improving, it showed that first time buyers borrowed 3.3x their income during May compared with 3.39x their income in July 2007.

There was another huge increase to the costs for taking out new fixed-rate mortgages in June which was another highlight of downward pressure on housing prices and yet another rising burden on consumers.

Bank of England figures last week showed that typically rates on a new 2 year, 75% loan to value fixed mortgage raised 37 basis points to 6.63%.

This is now the highest rate since Feb 2000 and goes far in explaining the reason why mortgage approvals have fallen in recent months. Approvals for new mortgages have doubled by 50% in a year while house prices have now plummeted to around 8% in as many months.

Tighter credit conditions will certainly not be lost on the policymakers at the Bank of England who have been meeting to decide interest rates.

Since the beginning of December 2007, central bank cut official interest rates by 75 basis points to 5.0%; however, rates on new fixed rate mortgages rose by over 50 basis points due to lenders moving to restore their margins.

During the height of the housing boom lenders were falling over themselves to lend money, however, since the credit crunch hit last year, their own funding costs have increased and their willingness to lend is at a new low.

The repayment shock for borrowers trying to refinance their 2 year fixed mortgages is huge, now paying on average 163 basis points more than when they originally took their mortgages.

Well, the US Dept. of Justice and Federal Bureau of Investigation don’t mess around with code names with their ‘Operation Malicious Mortgage,’ it certainly does exactly what the name implies! In a single day it brought one hundred and forty four mortgage fraud cases with charges against four hundred and six defendants and a further sixty arrests.

With similar (although far less dramatic action), The Financial Services Authority is taking action. Only this week, it struck off mortgage broker, Sadia Nasir, fining her £129K for her involvement in a whole number of fraudulent mortgage applications. Further to information gathered by the Mortgages Quality of Advice Process project, Robin Knox, another broker, received a ban and a fine on Wednesday.

Whilst Robin Knox was not engaged in fraudulent activity the Financial Services Association claim that he failed to put proper systems and controls into place which exposed five hundred of his customers which meant that they were put into in the situation of receiving unsuitable advice.

It now is merging that mortgage lending is not going unnoticed when it comes to incompetence and in some cases criminal activity. Now both the US and UK are firmly trailing organised groups of mortgage fraudsters. Surely though when legitimate borrowers who can no longer get mortgages, an organized or disorganized fraudster would try to tap into the home loans market? The Financial Services Association says this is not the case and thinner fees with tighter margins do present a renewed temptation to dabble in criminal behaviour.

Both the cases involving Nasir and Knox’s firms were under the radar of the FSA as far back as October 31, 2004 which was when the FSA began regulating over 7,000 firms who were conducting mortgage business.

The FSA should have acted far faster and it is wrong for struggling brokers to moan about potential bad publicity from industry crackdowns, even if the timing is terrible because it would be totally illogical for authorities to ease up right now as the most flagrant mortgage lending cases are likely to be exposed.

Average mortgage fees have now risen to ten times what they were previously in fifteen years, and some fees are now even higher than this. Thirty years ago it was possible to actually buy a house for the same costs of the fees attached to one of HSBC Bank’s mortgage fees today.

Generally speaking, the higher the mortgage fees the lower the interest rate, so if you have the choice, paying a higher fee, may, in the long run, reduce repossessions and defaults. This is because struggling property owners needing to remortgage can opt for the cheaper rate with lower monthly repayments through adding the cost of the fee to their mortgage loan.

Obviously, the downside will be that they end up paying higher interest over the course of the loan.
However, despite arguments supporting high fee mortgage deals, the actual extent to which average fees have risen suggests Mortgage providers are taking advantage of borrowers.

With fees of any description it is actually harder to make a comparison of the true cost of a loan. It is also increasingly apparent that the recent fee increases by banks like HBOS are being used to disguise the more expensive mortgage deals.

Alistair Darling was quite right in his recent speech when he cautioned lenders that he was considering taking action against their ever higher fees. However, now the Treasury owns Northern Rock, who is still charging fees of up to £1K, maybe he should consider getting his own house in order before he critics others.

The Chancellor Alistair Darling told BBC Radio 5 Live that he was aware of the continuing problems people were suffering relating to mortgage availability and the rising living costs.

He went on to promise that he would be continuing to look for solutions from the government for helping those people who are suffering from the current unsteady mortgage market.

Darling went on to say that the credit crunch, which began in the US in summer 2007, has now hit every country across the globe and the UK’s banking sector had been hit in particularly. He continued that the government was going to see what it could do to help but it would take some time to work through.

His radio interview took place after a lender survey held by the Bank of England showed that the mortgage market was likely to further decline in the forthcoming months.

Meanwhile, Barratt Homes have come to the rescue at one of their new developments in Coventry after agreeing to subsidies mortgages on apartments at its CV One development.

Barratt have just agreed to subsidies mortgage payments for new customers for 12 months at the development on Lower Ford Street.

This means Barratt will be paying £350 a month towards mortgage payments on its one bedroom apartments at the development and is also paying 5% towards deposits for its new homeowners.

The apartment prices start at £121,200, which is slightly below average house prices in Coventry.

Land Registry data just realized shows average costs of houses in Coventry is now £126,859, which is down 1.6% from June 2007.