Mortgages Uncovered

We are now 4 months into a global economic crisis and things are set to get worse. Insurance policy makers across the globe have already attempted to deal with ‘the problem’ (which is falling asset values and in particularly properties). Providing base rates of little above 0% has not solved ‘the problem’, yet.

Injecting flagging banks with billions of pounds hasn’t solved ‘the problem’, yet.

The introduction of a huge spending program devised by the government hasn’t solved ‘the problem’, yet.

According to the Financial Times the latest attempt to solve ‘the problem’, involves our government insuring banks

“against potential losses on risky loans in return for firm commitments to increase lending to credit-starved consumers and businesses.”

This is just like an average insurance arrangement works and the government will probably charge a fee to the banks for insuring loans. At this stage no one knows how the insurance premium will be calculated.

Will this new course of action solve ‘the problem’ if the problem includes falling assets?

There are many respected economists, who have said that the key for stabilizing this economy is to restore credit flow from the banks to the more credit worthy businesses and consumers.

However, if ‘bailed out’ banks are going to be forced to lend money then consumers go ahead and obtain e.g. a £400,000 mortgage from RBS which is majority government owned paying an interest rate of just 3.5%. Based on today’s economy and current salaries this is affordable, however, tomorrow when the interest rates start to rise again the surely these repayments will become unaffordable to customers and we could head to a second financial crisis.

The extra government support that lenders have been waiting for has now been announced by the government in a bid to shield the housing market from further dramatic effects which are set to occur in the economic downturn.

Now that government ministers have announced a full and comprehensive raft of supporting measures for financial institutions.

The Treasury has also just revealed its intention in protecting the assets of UK banks and building societies that have been “most affected” through the credit crunch, and, in the meantime the Bank of England’s liquidity scheme is to be enhanced drastically to further help lenders in the current market circumstances.

Additionally, the credit guarantee scheme which was made available to banks by the government is to be extended to aid them financially in the slow down and boost confidence back into the flagging mortgage market.

Should the new measures prove successful in making lending more readily available it could also be hugely beneficial to those who are seeing commercial mortgages.

Vince Cable, Liberal Democrat shadow chancellor criticized the recent moves, commenting:

“What has happened to the £37 billion of taxpayers’ money that’s already been given to the banks

The government is due to write a massive insurance contract for the UK banking sector. The gamble for ministers is that their determination in protecting banks against huge crippling losses makes it less that the insurance in place would ever be needed.

Government officials have been locked in meetings with decision makers of the largest lenders in the UK to finalise a variety of new schemes. The drastic measures are designed to give organizations and financial establishments’ access to wholesale market funding, whilst stimulating credit availability to consumers in an effort to hold off a long economic slump.

“If the economy gets going again you won’t have any claims,” one person involved in the scheme said on Sunday.

The government’s plans have raised questions. For example, how will banks compensate the UK government for providing them with this insurance? Would it be done through a fee, equity? Either way, it is obvious that compensation is necessary.

“The taxpayer has to see that this is not a gift to the banks,” one UK bank executive said on Sunday.

It is unclear as to how long the government’s insurance scheme will need to remain in place, taking into consideration that the average mortgage is 25 years, it could be that the government will find itself exposed to risk well into the future.

Part of the governments new plan to stimulate the housing market will be to directly intervene im the mortgage market.  One place they will be visiting with their new plan is Norther Rock as they start to kick start the building society’s mortgage lending after a year of the building society trying to lose as many of its customers as it could.

“Is it appropriate for Northern Rock to do more lending? That’s what we are looking at – it’s a possibility,” said a Rock spokesman.

The government is worried that mortgage lending has dried up so much in the last 12 months it may get worse as the global economy worsens. So it would seem that the best route to take would be to use a nationalized bank to lever their policy.

“The government will also consider further ways of addressing the loss of mortgage lending capacity in markets,” said the Treasury.

“As a first step, the government can confirm that Northern Rock is no longer actively pursuing a policy of rapidly reducing its existing mortgage book. A key objective of the company’s original plan, previously announced in March 2008, was to repay its government loan, primarily through a programme of accelerating mortgage redemptions,” said the Rock.  “This has been very effective and has enabled the company to reduce the government loan well ahead of the business plan,” it added.

There are approximately 240,000 households in England who own second homes which they do not rent out on a letting basis – experts in the market are saying that they expect there to be a large surge of second homes that will become available to let or will be on the market for sale soon.

Managing Director of Mortgages for Business, David Whittaker commented: “Turning your holiday property into a holiday home for others to enjoy could provide you with a good return on your investment while still enabling you to still enjoy the property. There may be many second home owners who are tempted to sell up in case house prices fall, however they could also consider letting”.

A holiday let property would normally be financed through a commercial mortgage with completely different requirements involving the length of the borrowing period, deposit and mortgage pricing which is normally starting at base +1.5% and vary up to 3%. Rates fluctuate depending upon certain factors such as demand in the area and occupancy.

David Whittaker continues: “The credit crunch may encourage more people to holiday in the UK over the next couple of years rather than overseas so good quality properties will remain in demand for holiday homes. The typical rent provided by investing in a holiday property will be higher than that for a normal Buy to Let property although demand for the property will obviously be seasonal. Investment in property should always be a long term strategy so if you still get to enjoy your property and can make it contribute towards its running costs then this is an interesting opportunity to consider”.

158 years of successful trading had come to an end for Bristol & West

Bank of Ireland made further comments recently that it will be operating moving forward by scaling back the UK mortgage operation which meant ditching one of its oldest brands Bristol & West.

Dublin based Bank of Ireland said 300,000 UK homeowners who currently own a Bristol & West mortgage will not see any immediate change, although they will not be offering replacement deals when the current mortgage deals expire.

Bank of Ireland said that its mortgages are not on offer directly to UK homebuyers or through mortgage brokers.

A Bank of Ireland spokesman says the move is in line with the company’s aim to reduce its exposure to the UK’s dwindling housing market. “The measures announced today are in keeping with the plans outlined in our interim results last November. The Bristol & West brand will slowly disappear over the next few years.”
David Hollingworth, of Bath-based mortgage broker London & Country, describes said; “It’s more grim news, and the end of a brand that’s been around for years. In fairness, Bristol & West hasn’t been doing a lot of new loan business through us since the start of 2008, but it is still a further blow to the sector. The company was quite a big player when buy-to-let took off, and it will continue to offer mortgages through the Post Office, though, given what it has said about its financial position, it doesn’t look as though it is going to be at the top of the best-buy tables”

There are a number of business lenders who have already responded to the recent Bank of England rate cut.
Due to the Bank of England’s 1.5% base rate cut as set by the monetary policy committee there are actually main firms who are able to make large savings.
97% of HSBC Bank’s small – medium sized business customers who were holding floating rate deals are about to benefit directly from the reduction.
The Managing Director of HSBC bank in the United Kingdom is Paul Thurston and he recently commented that the key issue for any company is the ease of accessible finance.
Paul Thurston commented on the commercial part of the market: “Small and medium-sized businesses need to know that they can access appropriate finance if they need it and that it will be sensibly priced.”
Mr Thurston also claimed that HSBC had managed to boost fund levels to make them available to small businesses during 2009; he said that HSBC finance funds had been topped by a further £1.5 billion this year.
Lloyds TSB Commercial customers who have overdrafts and variable loans will now benefit from the recent base rate reduction the bank has just announced.

Figures indicate that the property prices in London are falling far faster than in any other area of the country.

Last year property prices dropped 13.3% in comparison to average price drops throughout the rest of the UK which were 12.8% says the Centre for Economics and Business Research (CEBR).

“The house price fall in London has narrowed the gap between prices in the capital and prices elsewhere in the UK,” Douglas McWilliams, the chief executive of the CEBR, said.

This was the sixteenth of a monthly decline in house prices. Scotland, has experienced marginal growth.

Every type of property has suffered, the most expensive 20% of properties dropping by 12.8% in value each year.

It has been terraced housing that has been hit the hardest with the average price tumbling 13.2% in the past year.

The most resilient for prices has been detached houses with a year-on-year drop of 10.8%.

Mr McWilliams said that interest rates — cut to an historic low of 1.5 per cent last week — were now “so low that the economy may not benefit from any further base rate cuts”.

He said that other measures might be needed to curb the drop in house prices.

He said: “We urge the Government to act upon the recommendations set out in the Crosby review and set up a mortgage loan guarantee scheme.”

Research for Independent newspapers shows that Mortgage rates are no cheaper than since December’s 1% rate cut.

Research shows that out of 1,000 available mortgage products that lenders have shaved the average fixed rate mortgage deal by just 0.14 percent, from 5.76 percent to 5.62 percent, showing us that the lenders have kept the vast majority of the 1 percent Bank of England base rate cut themselves.

Fixed rate mortgage deals have become expensive and the average Tracker has risen 25%, and the average loading applied to capped rates rose from 2.35% to 2.6% higher than the BoE base rate after December 4.

Research also indicates that a typical tracker for a loan of £200K would see a borrower pay £40 extra a month, although the Bank of England cut should actually have seen a borrower paying £160 less per month.

Think before re-mortgaging – 11.7 million mortgage holders will have none or very few savings from the BofE interest rate cuts. First time buyers are still finding it very expensive to get on to the property ladder, with large deposits, strict lending criteria etc. the house prices are dropping further.

Mortgages taken out 18 months ago could become unexpectedly attractive

The recent plunge in interest rates is having a knock-on effect to mortgage rates which raised the possibility that some lenders may have to pay interest to some of their borrowing mortgage customers.

These borrowers are those that took out tracker mortgages in 2007 and part of 2008 (they specified that the interest rate would stand at a margin below the BofE’s base rate.

“The deals were incredibly popular; people snapped them up, they could see they were a good deal,” says Andrew Montlake of mortgage brokers Cobalt Capital.

Just before the credit crunch hit, 83 of these tracker deals where offered by 33 different lenders.

The likelihood of repayments from lenders occurring is very low because these deals only lasted for a short time.

Paul Broadhead of the Building Societies Association (BSA) says it might all depend on what the mortgage contract says.

“It is a possibility, but it depends on the terms and conditions. Some deals have conditions that set an absolute floor below which the interest rate will not fall. But the likelihood of repayments happening in a great number of cases is low as many such deals lasted for only a short period of time,” he points out.

“Very few had a floor written in – not many stipulated there was one at all,” says Andrew Montlake. “I have spoken to a few lenders about this and none are saying what they will do.”

Bernard Clarke at the Council of Mortgage Lenders (CML) is sympathetic to that view.

“What has been said by some lenders is that there is nothing in the contracts about interest ever being repaid to customers. It seems ridiculous that someone should be paid for taking out a loan,” he adds.