Mortgages Uncovered

Over the course of the last week there has been nothing short of a revolution in the financial markets in the UK which have now left taxpayers owning a 40% stake in Britain’s mortgage market. The whole episode happened at such speed that there is somewhat of a mystery which still shrouds the ‘terms of engagement’.

Gordon Brown still wants the partly nationalized banks to be independent but then demands that they return the 2007 mortgage product availability to the market:

.”For savers, for small businesses and for homeowners, we must, in an uncertain and unstable world, be the rock of stability on which the British people can depend,”

he has said.

Figures reveal that the first nationalized lender, Northern Rock, is twice more likely to repossess homes than any of its competitors. During the last 3 months, it has repossessed 500 homes bringing its current number of repossessions to 4201.

There needs to be a balance between Northern Rock customers and tax payers, however, it seems at the moment the tax payers are coming out on top.

Already Northern Rock paid back some of its 26 billion debt by £15 billion, although its mortgage arrears have risen 60%. The majority of these arrears come from people who have the “Together” mortgage which means that they were able to borrow up to 125% of the value of the property. Most banks who based their products on this type of dangerous gambling in predicting an affluent buyers market and continuing rising property prices have been hit the worst.

Homes that are being repossessed are likely to sit empty in a slow moving property market and they solve no purpose in benefiting the lender, the tax payer or the original owner.

The current level of home repossessions in the UK is still only barely 50% of the 1991 housing crash and it is small in comparison to the current sub-prime US crisis. Extension of income support for the unemployed on their mortgage interest will help. Although, it is time now for lenders to start echoing the faith the government has shown in them and to do their part to boost the property market by offering good affordable finance products to property buyers and home-owners.

Long gone seem the days of 95 percent mortgages, loan to value (LTV) and many financial organizations have felt they have had to do it because it is too much of a risk in this day and age, however, it has now been suggested that this is exactly what we need injecting into the property market to kick start some life back into it.

Gareth Samples, The Your Move Sales Director suggests it will start to become increasingly more difficult for any first time buyers who are trying to get their foot onto the first rung of the property ladder and in many cases will be virtually impossible for the younger generation to buy properties now and in the future unless lenders revert back to their higher LTV’s.

He said:

“The first-time buyer mortgages at 90, 95 and 100 per cent were pulled and that takes a whole sector of the market out. People that can afford a high deposit or have a lot of equity in their homes “will be ok”, he said, but added that building societies will be unwilling to take a risk on first-time buyers.”

According to a survey recently carried out by the Co Operative Bank in conjunction with Places for People unveiled that today’s average person would need to raise a minimum of around £19,100 to even start to get onto the property ladder. Additionally, some people surveyed also felt that renting a property was literally “throwing money down the drain.”

There will be over 19 thousand homes that will be repossessed during the first half of this year as homeowners struggled to meet their mortgage repayments.

What should I do if I’m struggling to make my mortgage payments?

Since mortgage lenders have been told to treat their mortgage holders with sympathy, the best thing to do is to tell your lender if you are struggling. If you think your problems are only temporary they are possibly able to arrange a repayment mortgage holiday for you, which mean that the arrears added to the end of the mortgage. If your problems are more long term then you could discuss switching to an interest only mortgage or increase your borrowing term either of these options will reduce your monthly amount. There are some mortgage lenders who have their own help-lines and debt counseling facilities which are really useful.

If I can’t make the whole mortgage payment should I still make some contributions / repayments?

Even if you can’t pay the full mortgage amount owed for the month, should you at least show willing and a desire to pay some of your mortgage it does mean that the lender will be more willing to help you. Your lender will often accept some reduced payments towards your mortgage for a short time until its customer can make full and arrear payments.

Where am I best to get free advice?

Citizens Advice, National Debt-line, Consumer Credit Counseling Service. Additionally, these organizations will speak to your lender for you and are also great places to go if you require help with any other debts as well as your mortgage.

Can I get help from the government in paying my mortgage?

You may qualify for Income Support for Mortgage Interest; this means that the interest on your mortgage will be paid after 39 weeks of unemployment. Now the Government has raised the number of people who qualify for this and the speed they will receive help from April 2009 when unemployed with qualify after only 13 weeks of unemployment, covering interest for mortgages up to £175,000.

Check your insurance policies

Most even basic mortgage payment protection insurance policies will cover your full mortgage repayments should you be unable to work through an accident or illness or losing your job. Typically these policies will cover you for 12 months and will normally pay out 1-2 months after you make your claim and will require you to have paid your policy consistently at least 3 times before you can make a claim.

Some companies will allow you to sell them your house and then rent it back from them, is this a good option?

There is an increase in companies doing this, however, think before you do it. Due to this being a relatively new and therefore, currently not regulated, at the moment the Office of Fair Trading recently are calling for this new financial sector to come under urgent regulation.
Some of these companies will pay people a fraction of what their home is really worth and some tenancy agreements can only last for only 6 – 12 months. Some of the more unscrupulous companies, without a regulation in this industry can suddenly impose steep rent increases which people just can’t afford. If your landlord does not pay the mortgage you can still lose your home and if you couldn’t afford the mortgage payments in the first place there is a chance that you may not be able to afford to rent your house back.

New record low figures have been released from August 2008 which shows that only 42,200 people took mortgages in this month. Other figures released show that the average home in the UK has fallen by 3.4% in value over the past 12 months.

The full value of all approved mortgages during August was £6 billion, according to the (CML) Council of Mortgage Lenders and is the lowest figure since the association was founded which is a full £10 billion drop from the figure in August 2007.

Out of the 42,200 mortgages taken in August there were roughly 15,600 mortgages that were for first time buyers.

The CML say that most borrowers have opted for fixed rate deals in order to shield themselves against any potential upward movements in the future on the Bank of England base rate.

Average house prices were £211,410 during August which was a drop from £217,171 which was recorded in July 2008.

The Royal Institution of Chartered Surveyors issued a report stating that their members on average are selling less than one property a week each.

The Director General (CML), Michael Coogan, has stated that the government’s £37 billion bail-out would stimulate the slow housing market in the long term.

“The package of measures announced yesterday will have a positive effect, but it will take time for it to feed through to the mortgage market,” he said.

As he comments on recent figures, Economist, Howard Archer, at Global Insight, said:

“Even if the bold government measures to tackle the financial crisis work on a sustained basis, it will undoubtedly take time for confidence to improve and mortgage lending to pick up significantly. This is despite the fact that the government has made RBS, Lloyds TSB and HBOS promise that mortgages will be available at 2007 levels for at least the next three years. Meanwhile, demand for mortgages is likely to remain muted for some considerable time.”

Whilst the government has pumped funds into the flagging banking sector it has us asking “Where has all the money gone?”

Treasury Mandarins, banks and economists are actually very precise regarding the figures on their ledgers; however, the language that has been used in some cases to describe the situation can be rather sloppy. For instance, when they say that a financial establishment has been “given” more funds, what they mean is they have been “lent” more funds, or in fact, the bank has been given the chance to swap one asset for another.

The Treasury recently made a statement;

“At least £200 billion will be made available to banks under the Special Liquidity Scheme”.

Whilst this comes across as a handout from us as taxpayers, it’s not.

The assets that the banks have e.g. current mortgages on homes cannot be used, so there is an urgent requirement to raise much needed cash to fund it’s every day operations.

With the new government Special Liquidity Scheme, it means that Bank of England can now swap IOUs or cash, in exchange for the most secure top quality mortgages/assets.

This will happen on the assumption that it all gets paid back to the government, and sometimes this could be within a matter of days. The Bank of England (which also means the taxpayer), will now earn a fee for providing this lending service.

The 50 billion figure that has been quoted in the press is being used to buy shares in financial establishments and therefore shares for the taxpayer so we hope to see this money again.
Both the Chancellor and the Prime Minster are committed to defending major banks, so value of shares may well rise and if they are sold off we would see a profit.

Bank Account
Not only has Gordon Brown given savers a complete government guarantee but he has gone on to guarantee the savings of individuals who have savings in collapsed Icelandic banks.

If a bank is government-backed is it safer?
If your savings are in a government-backed bank they are safe. With regard to other banks the government has given another guarantee on savings and protection from the financial services compensation scheme which means that the first £50K per person is protected, this rises to 100K in any joint account.

Should you move your money out of Ireland?
Well, the Irish government has fully guaranteed everyone’s savings for 2 years, whilst in Britain the guarantee has not be set for any definable time limit.

Is it getting easier as a first time mortgage borrower?
The interbank money markets which reflect directly on our mortgage market have received additional funding which will mean more movement in our mortgage market. The government is encouraging banks to lend to homebuyers (but responsibly). This should mean more availability for mortgage financing and additional help for first-time buyers. 100% loan to value is expected to be difficult to get from now on.

Will my bank charges increase?
There are many banks that are still currently fighting in court against the ongoing allegations that their charges on overdrafts are too excessive. At this moment in time there is a possibility of imposed fees being added to some current accounts if the banks are forced to reduce their costs elsewhere, however, now the government has more say in treating banking customers fairly.

Government owned Northern Rock Mortgage customers will not be getting last week’s 0.5% BofE interest rate cut.

Bank of England and a variety of other central global banks across the world cut their base rates by the same amount in a bid to stimulate flagging economies.

There were many mortgage lenders who promised immediately after this that they would pass the full cut to their customers which would typically save most customers somewhere near £50 per month.
Northern Rock mortgage borrowers who qualify after 7 years, for their loyalty discount will now get rates of 7.09% on SVR’s.

The new Treasury owned bank claims that it will be passing the 0.5% cut to its tracker customers on 1st December 2008 which is a month after most mortgage customers with trackers at other banks will receive their rate cuts.

A spokesman at Northern Rock would not deny that the main reason for the late cut was to encourage its mortgage customers to jump into the hands of other mortgage lenders.

“This is very much in line with the terms of the business plan set out by the Treasury,” he said. “Our aim is to generate mortgage redemptions to allow us to repay the Bank of England.”

He also claimed that their controversial pricing policy had made 115K homeowners take their mortgages to other places over the past 6 months.

The worst hit by the Northern Rock decision to hold back its full rate cuts are those people who have the Together Deal at 125%, they are now stuck with the higher rates because they cannot move their mortgages when their homes are worth less than the amount they borrowed.

Old enough to remember the property crashes in the 1990s and 1970s, there are 1 in 3 baby-boomer homeowners who will still hold a mortgage at retirement age.

In accordance with Impartial.co.uk research who are an online “find a mortgage” service, there are more than 1.4 million homeowners who are aged over 55 years and have at least ten years left to go on their mortgages.

Director of Douglas and Gordon Estate Agents, Ed Mead, says that the most affluent of the baby boomers generation have only just been hit.

“It’s very recent. PostLehman Brothers, they’ve started worrying about where their savings are, and about the future.” After the crash of 1989, it took seven or eight years for prices to come back,” he says. “This time it’s different, because everything has happened so quickly. Prices have dropped by 25% in six or seven months, so it should take only three or four years for them to come back.”

Sixty two year old, managing director, Tony Davison says that last year he decided to sell his 8 bedroom house in south west London.

“I don’t need such a big house, and the plan was to gift each of my children enough money to enable them to get on the then rising property ladder,” he says. “I did some remedial work and put it on the market in June 2007.”

Tony Davison finally accepted an offer of £4.25 million for the house.

“He was a senior man in a hedge fund who apparently had no chain, nor any need for finance, but he pulled out for personal reasons in August, about a week before we were due to exchange.” The timing couldn’t have been worse. There were other offers, but nothing to match the first one. “Gradually, the bottom fell out of the market, so we have withdrawn it now,”

A few things to consider during the slump:

It is expected that the market will hit rock bottom by 2010 at the very earliest, this means that if you do need to sell your house any time soon, there really is no point in waiting any longer. There is a chance that you may get even less for the house this time next year.

If you decide to stay in your house there is an opportunity for you to raise money via an equity-release scheme – which is a specific mortgage which is for the capital-rich and income-poor, where the interest is rolled up to be deducted from the sale proceeds on sale of the property.

If you do have a large garden maybe it is worth considering selling part of it to a property developer.
Rent out the spare room, garage or even a parking space you may have. You could rent the whole house and tent yourself something smaller for now.

Gordon Brown said:

“This is not a time for conventional thinking or out-dated dogma, but for fresh and innovative intervention that gets to the heart of the problem.” He did just that, out ahead of the world in bank financing and much praised. He walks and talks like a man who has found his feet, no longer drowning but waving. When he proclaims “The end of the age of irresponsibility”, we have to forget that when it mattered he never once uttered the words he now uses: “The days of big bonuses are over.”

But will this really happen? When the Commons receives the banking bill it will be met by resistance unless it states that taxpayers’ cash will fund it. The FSA and banks are drumming up private deals; the advice they are getting from the FSA is to put as much capital aside as possible and not to indulge in any bonus schemes that may look risky. Advise perhaps that would have been more wisely used to avert this disaster if implemented a year ago. It is expected that Parliament will be angry just as Congress was.

It is expected that MPs will start demanding that any government capital invested into a bank cannot pay out in dividends or bonuses for a minimum of 12 months. Lord Digby Jones has been warning that some of the financial sectors best talent could flee to places such as Mumbai, Dubai and Shanghai if they are denied their big bonuses. However, the wiser observer may suggest it would be better to ‘let them go this’ as this now is a whole new era of sober banking.

The test will come after all this drama is eventually over and the country is looking at years of high unemployment and people and the state are very short of spending money. The overall mood could well turn sour as it is the governments everywhere who will take the blame.

There are 45,000 mortgage defaults and repossessions this year and twice as many predicted for next year. There may be another 25% to add on top of next year’s figures as there will be accelerated numbers of homes lost through credit card debt due to a new law which has hit at a very bad time which suddenly makes it easier for most creditors to repossess houses.

Government can now well start to order banks to begin adopting forbearance on repossessions; people who are in trouble will be allowed to switch to interest-only mortgages.

The Labour government has already passed the allowance to allow unemployed homeowners to use their housing benefit to pay their mortgage interest after 3 months of being out of work; this has been reduced by 6 months. However, this change does not start till April 2009.

In response to this week’s Bank of England base rate cut the Abbey promptly raised its interest rates on its “trackers” by 0.5% completely eradicating the benefits of the government’s emergency cuts.
As the UK’s second largest mortgage lender the decision, they say, is due to the recent freeze in the money markets.

In recent months it is the tracker mortgages that have been drawing the most attention and have looked the most viable for borrowers as expectation had been mounting in the run up to the B of E base rate cuts (which the rates on Tracker Mortgages are directly dictated by). It seems though that lenders are now raising their rates and taking off certain deals to protect their profit margins as they don’t want them to be eroded by the Bank of England base rate cut.

Chase de Vere Mortgage Management, Aaron Strutt, said:

“Abbey has sent the message that mortgage rates depend on the money markets, not the base rate. Until interbank lending rates fall, banks will continue passing on the costs to borrowers in the form of higher rates.”

Cheltenham & Gloucester immediately pulled its popular trackers from any borrowers who are only deemed to have a small deposit. The Yorkshire Building Society went on to pull every single one of its tracker mortgages and Woolwich increased their rates on their tracker deals.

Current home owners will benefit more in the immediate term as HBOS, RBS, NatWest, Woolwich and Lloyds TSB said they are passing the rate cut directly to their borrowers as of 1st November.

A spokesman for Abbey said:

“Following the announcement that the Bank of England has lowered the base rate by 0.50 percentage points, as of this Friday Abbey is maintaining rates on its range of trackers for new customers. This is a reflection that the short term variable funding costs have not reduced.