Mortgages Uncovered

Lenders are saying that they expect their borrowers to be “substantially better off” following the cuts last Friday.

The majority of the UK’s biggest mortgage providers have finally passed on the entire 1.5% BofE rate reduction to their SVR, standard variable rates. One bank also went on to announce that it was cutting its fixed rate mortgages and other lenders are expected to make similar changes in the following week.

Royal Bank of Scotland, HBOS, Bradford & Bingley, Nationwide and Northern Rock followed the example set by Lloyds TSB and Abbey by cutting their SVRs by 1.5%.

Halifax customers are going to pay 5% whilst Nationwide customers 4.69%. The changes are effective from 1st December.

Nationwide’s chief executive, Graham Beale claimed that their borrowers would start to see their rates dramatically fall and would become much better off.

Less than 10% of borrowers within the UK are now estimated to hold mortgage products which are directly linked to their lender’s SVR and this figure has further increased due to struggling home owners looking for alternative financial deals.

CML warned against reading too deeply into the caution that some lenders have had in not altering their lending rates too quickly.

Since the last interest rate cut there are only 30 lenders out of 88 passed on the full interest rate reduction to customers.

HBOS has confirmed the concerns that their mortgage arrears and customer defaults for unsecured lending has risen further, so their mortgages arrears represent a total of 1.55%.

The arrears on HBOS self certified mortgages have raised to 3.59% which represents this lender’s total of 12.6% of their mortgage account holders.

The decline of house prices coupled with the increase in arrears has resulted the £440 million charge to the bank covering the 9 month period from 30th Sept this year which is over double the £213 million which was recorded in June 30th 2008.

With regard to the declining house prices the result for the bank (as with others), has also been the impact in the average LTV of the bank’s mortgage products.

An average LTV for HBOS was 52% in their mortgage book at the end of September this year which shows a rise compared to the 48% recorded on 30th June 2008.

Additional we have seen a drop in corporate lending which has particularly affected the construction and housing sectors.

HBOS has stated it feels that its strong leadership position within the retail banking section will help to see it through all the financial turmoil and it plans to take a more selective approach to corporate and international markets.

“While the credit environment will remain challenging, HBOS’s robust capital position, to be further enhanced by the injection of capital and liquidity facilitated by the UK government, reinforces the group to meet such challenges,” HBOS said in a statement.

Since June 2008, repossessions shot to 71% as published by the Financial Services Authority (FSA). Through the continued struggles this figure is set to rise.

There are still some households that won’t feel many benefits from the second mortgage cuts.
There will be a third of the UK mortgage market who can celebrate though as 4.2 million homeowners have existing mortgage deals which are directly pegged to the BofE base rate. It will ensure that they all benefit from a guaranteed drop in their mortgage payments by December 1st.

The outlook for those looking for a new mortgage through a tracker deal is, however, far less certain. Lenders have speedily withdrawn their tracker deals for any new borrowers for the surprise Bank of England’s announcement. New deals will start to appear in the following week however, this will be on new terms and the margins are set to increase. It is also expected that fees may continue rising so banks may offset the BofE rate cuts.

Borrowers are now also urged to check the small print on existing tracker deals because some lenders clauses preventing the lender from passing on any rates that fall below 3%.

Experts think that this could be a sign for the future that products may start to change and banks may begin to move away from loans that are directly linked to the BofE interest rate.

The practice which is common place in the sub price market is to link mortgages directly to Libor in the money markets rather than to the base rate of the BofE and Experts think this is the way that banks will start to re-price their products. Libor is 1% higher than the BofE base rate.

The government owned lender Northern Rock announced it was pulling every single mortgage tracker deal and is now further expected to increase its rates again when it re-launches its mortgages shortly to the market.

Northern Rock’s announcement came shortly after a decision by Abbey National to increase the interest on its tracker rates by 0.5%.

Abbey, who is owned by Santander, has now effectively cancelled out of the Bank of England’s rate cut which was designed to alleviate over burdened homeowners.

Experts also claim that they expect lenders to continue to protect their profit margins to the expense of homeowners.

A spokesman from Chase de Vere said:

“All the big lenders are expected to change trackers in the next few days. The margins between new tracker rates and the base rate are going to continue to increase.”

C&G, who are owned by Lloyds TSB, are now said to be the next bank looking at reviewing its tracker deals and there are other lenders who it is felt will follow suit.

Peter Mandelson had already attempted to add pressure on lenders to pass on the Bank of England’s expected base rate cut to homeowners, saying that banks that did not would face a customer backlash.

Geoff Tresman, chairman of Punter Southall, independent financial advisers, said:

“A one per cent cut would bring us in line with both Europe and America and would send out a significant and positive message to consumers and markets alike that the Bank of England knows the depth of the problem and is prepared to act.”

However, a spokesman at John Charcol mortgage brokers warned the spread between 3 mth Libor and the BofE base rate was remaining historically wide which was hindering the banks in cutting rates any more.

“The gap between trackers and the base rate is going to carry on getting wider for the next six months until conditions in the money markets ease further.”

There are, however, millions of existing customers who already have tracker deals that have benefitted from the base rate cut.

The government is continuing forward with its quest to save and in some cases rule the financial markets during their continuing concerns in financing the costs of banks and reducing base rates. There are certain financial establishments that have chosen to completely remove all their mortgage products in order to protect their dwindling profit margins.

Continued confusion over the HBOS and Lloyds TSB merger whispers of a counter offer from the wings which is also rumored to be announced this week.

Competition in the mortgage sector has been further reduced by the amount of banks / building societies that have struggled so much they have needed to be bailed out by BofE and taxpayers.

Furthermore, since the base rate was reduced mortgages have barely moved to accommodate the customer, in fact there has been some migration on interest rates on certain mortgages migrating upwards rather than downwards.

The average UK taxpayer would not be forgiven for thinking that they are in a worse position now than they were before their hundreds of billions of taxes were ploughed into the government rescue package to salvage flagging banks (which consequently aided the government to cut the base rate ) when it seems perfectly clear that taxpayers are not given the proper benefits of a larger range of new or lower rate mortgage products for first time buyers and those struggling with their current mortgages.

There have been no clear indications as to when this may change in the future.

In the UK property market it is the self builders who have always enjoyed the best financial gain. They enjoy a 35% equity gain on the day the deeds are signed over, not only this they save on all Stamp Duty.

Negative equity is a term that we are hearing more and more in the housing market and last week the Bank of England revealed 1.2 million property owners were likely to find they are trapped in a home that is worth less than the mortgage due to plummeting housing prices. Some people try general home improvements, like double-glazing up in Manchester or similar northern areas and loft conversions in Essex and southern locations.

However, there is one special type of homeowner who is more equipped in fighting the return on negative equity than the rest of us and that is those who were able to build the homes that they now live in.

John Hay, marketing director at self-build specialist Build Store said

“When the house is complete, it should be worth around 35 per cent more than the total cost of the land and the build. This cushion against negative equity means that now is the perfect time for self-build.”

Ray Boulger, technical manager at broker John Charcol.

“Self-build is one of the sectors that have been affected least by the downturn as the very nature of the beast addresses negative equity issues from the start. It also only accounts for a very small proportion of mortgage lending.”

As an idea, Norwich & Peterborough building society will currently still lend 85% on the value of the purchase price on the initial plot of land, however, for the total cost of a completed build it will only lend 85% of the total cost of land including the build.

For example, if the land was worth £100K and the build would cost £150K, a self build mortgage borrower can now access £212,500.

The way this works for a self builder is that they release the sum of money in installments from the lender – these are 7 stage installments categorized as ; “foundations”, “wall plate level”, “and roofing” – these sums of money will equate to 20% of the total loan. The lender will value each stage separately before releasing the money.

The full 100% of the loan amount will have been issued upon completion of the build.

The buffer which the lender has in place is that it pays for each building stage in arrears rather than in advance so the borrower has to find the money for the first stage or ‘foundations’ themselves.

“The cost of this will depend on the house but it is unlikely to be less than £10,000,”

says Richard Barker, product manager for mortgages at N&P.

There is one thing that the UK financial market has always been able to offer and that is choice.

Frequent and often miss sold products, a regulator clearly not doing its job and appallingly priced mortgage products always seem to be mitigated should you be a savvy consumer by shopping around for the best deal – the UK was the best place to find a great mortgage deal. It is still possible to find saving accounts that offer good interest rates and interest free balance transfers and purchases on credit cards.

However, now in the mortgage sector our choices are lessening and it seems to be getting worse. Before the credit crunch 16,000 mortgage products were on offer to the general public. Now we have little over 3,000 mortgage products on offer after a further 1,000 products disappeared in the last 2 weeks!

There are, it seems only a handful of financial organizations actually really still lending and the remaining banks / building societies have purposely miss priced their mortgage products to deter customers. One 3rd of the 3,000 mortgage products available on the market are actually available directly from the lender. Mortgage brokers everywhere are starting to lose money.

October’s housing market saw mortgage approvals rise for the first time in 12 months and the fall in house prices was the smallest fall since June this year according to Nationwide. In accordance to some economists the pattern this is starting to follow could suggest a rapid recovery.

BofE forecast this week that 1.2 million households were now in negative equity and repoessions are said to have risen by 71% and for the first time mortgage redemptions exceeded new mortgage lending.

However, from October’s 1.4% recorded fall in house prices was the lowest since June and is below the average falls recorded over the previous 8 months. Mortgage approvals also rose for the first time in a year.

At the peak of the housing market an average home could cost the buyer 6x their income. Oliver Gilmartin, senior economist, Royal Institution of Chartered Surveyors, stated:

“With sharp falls in prices we anticipate that could fall back to more sustainable levels of about four and you’ll start to see first-time buyers moving back into the market. After the boom of recent years, prices are about to reach their long-term norm – the value they would be if they had simply kept increasing at the steady 2.9 per cent a year above inflation they have averaged over previous decades.

So after the years when homes were expensive, they are on the brink of becoming cheap by historic standards. However, they will become even cheaper before prices bottom. Values may not dip as far below that long-term trend line as they overshot, but crossing the boundary from above average to below does suggest the market is about halfway through its collapse.”

For years, some first time home buyers may have watched house prices soar to unattainable price, most will have decided to wait for the market to change. Now, during a property crash and recession according to Nationwide last week UK house prices had dropped at an average of 15% based on 2007 which is the equivalent of seeing £30K wiped off the value of the average house.

Now in the perfect buyers market as far as property prices are concerned, it should be the perfect time for first-timers to grab a bargain; however, the deals available on the market are less attractive than the property prices and demand far tighter criteria than ever before imposed by lenders.

The banks have had a rough time in raising money in the international money markets and as a result are forced to restrict other areas of lending which means that borrowers are being asked to raise higher deposits, in some cases this is 10-15% of the value of the property.

Abbey has responded to current market demand and has just launched its First Home saver account.
This is an account that is only limited to a minimum of 5,000 new openings and is specifically provided for those who are saving for their first home. The age of account holders has to be 16 – 35 and they must pay £100 – £300 by standing order into their account per month. The account will pay a huge 8% variable interest rate on savings which is way above the BofE base rate. These interest rates will fluctuate at the discretion of Abbey. Any customers missing a payment will only benefit from a lower interest rate of 0.1p until the full payments are resumed.

“The days of 100 per cent and 95 per cent mortgages are well and truly over. People need to save and this seems an innovative way to do it said Andrew Hagger from financial advice website moneynet.co.uk. But “in the current climate, saving £300 a month may not be enough. It could still take four or five years to get deposits together just using this account, people should consider saving into a best-buy individual savings account alongside this. There is a caveat with the Abbey account, when the account holder decides to close their account; they have to have a meeting with one of Abbey’s mortgage brokers. “The idea of this … is to migrate the savings customer into the more profitable mortgage one,” said David Hollingworth from broker London & Country. “I understand that the customer doesn’t have to take a mortgage with the Abbey, just see the adviser. What they are best doing is taking the high interest rate on offer, see the Abbey adviser, but also compare what is being offered by other lenders and go for what suits,” he said.

If Bank of England continues to slash the interest rates then mortgage payments will really start to fall for all of us that don’t have a fixed rate mortgage. These could be cut as low as 3% in the future.

Previously it was those who had Trackers that would enjoy the steep cuts to monthly payments although now they could be in for a shock if they did not read the small print to the mortgage clauses offered by some of the high street’s biggest lenders. Some of these conditions incorporate an additional clause which states that although the contract makes clear that the loan is tied to the BofE base rate it is at the bank’s discretion as to whether they pass on the interest rate cuts.

Those people who have “standard variable rate” mortgages will see little to no benefit from the base rate cuts.

Only 50% of banks have passed on the recent interest rate cuts to the general public so far and it is a concern that if the BofE slashed their base rate again, it may be used by banks as a strategy to rebuild their depleted profit margins.

Tracker mortgage holders should have the most to gain from the recent BofE cuts. However, just recently it has become apparent that several major lenders have what is called “collars” in their contracts, in layman’s terms means that there may be some customers who could lose out.

Spokesperson for John Charol, Ray Boulger, states that collars are now a “hot” issue.

“Most mortgage companies have a clause in their terms and conditions that allow them to get out of tracking base rates down to zero – but only in exceptional circumstances. But if rates come down normally, I wouldn’t expect the mortgage firms to use those clauses and deny customers lower rates.”

Ray also says Nationwide has actually got a ceiling of 2.75% in place which is irrespective of the base rate which means that its tracker customers can never benefit from interest base rate cuts of below 2.75%. Halifax is the same but their ceiling rate is 3%.

RBS, Abbey, and Woolwich, have all said that their Tracker Mortgages will follow the BofE base rate wherever it should go.

HSBC appears to want to disclose its standing when the market conditions become clearer, an HSBC spokesman said;

“The intention is that tracker mortgages will track downwards, as rates fall. However, the tracker terms and conditions do say that we reserve the right not to pass on cuts in base rate to tracker customers if there is a material change in the mortgage market. “We have no appetite to do so, and our intention is to continue to meet our customers’ expectations and pass on rate cuts,”