Mortgages Uncovered

1 million mortgage borrowers with offset mortgages have been told that the low interest rates may negate the benefits of setting their savings against loans.

Borrowers with offset mortgages are not credited with interest on their savings, however, the do not have to pay interest on the equivalent amount of their outstanding mortgage loan.

Ray Boulger of John Charcol, the broker, said: “These borrowers would be better off investing in a separate savings account now, such as ING Direct’s account paying 5% gross interest. “They would still be better off even if savings rates go down to 4%, as even higher-rate taxpayers will be earning 2.4% interest while paying less than 2% on their mortgage.”

For new borrowers with large savings paying higher rate tax experts now say it is worth taking out an offset mortgage. But if one borrower does not pay tax anyway, an offset mortgage is far less attractive.

Boulger said: “The general advice for anyone with an offset mortgage on a sub-Bank rate tracker, or even on a rate only a little above Bank rate, is to switch any funds in the linked offset savings account to a new savings account with ING at 5% until their initial mortgage deal finishes — or ING cuts its rate significantly — when it may make sense to switch the savings back to the offset linked savings account. After a year it will certainly be necessary to either start using the offset savings facility again or switch to another savings provider, as without its huge 2.17% one-year bonus the ING rate is uncompetitive.”

ALISTAIR Darling is putting £100 billion of taxpayers’ cash into the struggling mortgage market.

The plan involves underwriting most new mortgages in the United Kingdom to encourage large investors to give the critical money lending to banks.

This now means the UK Government would guarantee mortgage bonds, (which were previously parcelled up by banks and sold them to investment firms). This provides a source of money to banks so they may loan customers and investors then get a return.

Now investors are reluctant to risk their money on mortgages, so Alistair Darling is to guarantee the value of these mortgage bonds in order to get cash flowing again.

£100 billion is the total value of new mortgages which are involved leading to claims that this scheme has too many risks to the taxpayer whilst offering far few rewards.

Last night officials confirmed the mortgage bond guarantee plan was now “on the table”. A source close to the discussions said: “Two years ago, banks had a huge pool of finance which has now dried up.

“The more high-risk mortgages will probably not be included, but the idea is to package up the new mortgages. The Government would then offer some sort of guarantee should the market continue to go down.”

Prime Minister Gordon Brown dropped a major hint last week he would support the move, saying he wanted to “secure the funding necessary for home ownership”. Darling is already warning a potential recovery in the housing market may be stymied because home-buyers can’t get funds.

The price of our homes plummeted last year by 15.9% which is the largest annual drop of house prices ever to go on record, experts now warn that the situation in the precarious property market is far from over and 2009 will see a very turbulent year.

Nationwide published recent figures showing that the average cost of UK homes fell by 25% in December 2008 which further dashed hopes that the original 0.4% slide would mean that the marketing was finally stabilising.

The fall of prices during 2008 was the largest on record since data began being collated on the housing market.

The largest property drops were experienced in Northern Ireland where they experienced a 34.2% average fall. The cost of housing in London also fell hugely.

Property price plunges of a further 10 – 15% are predicted for this year.

Halifax data appears to ‘marry up’ with Nationwide’s figures released last week – data showed property prices had dropped 16.2% over the last quarter of 2008.

Most of the property experts are now predicting that house prices would still need to fall further to prize buyers back into the UK’s beleaguered housing market. Nationwide decided not to comment on what the estimated house prices may drop to during 2009.

The 0.5% rate cut is now the 4^th cut that the Bank of England have made in a consecutive row. The new 315 year record low is a never been seen 1.5% base rate.

There could be around 11.8 million mortgage borrowers who will see yet a further reduction in their main household bill.

Half of all the UK’s mortgage borrowers have fixed rate mortgages and will not benefit. There are also a few lenders who have pledged not to pass on any further rate reductions to customers who have tracker mortgages with collars which are going to have a bigger impact in producing unhappy customers who were unaware of the collars in the first place.

Whilst the additional base rate cut is a welcome positive in most cases it still remains the fact that the UK is in the middle of the worst financial crises since the last world war and it is set to get worse.

In the past four months, the British pound has collapsed badly against the US dollar and the euro throwing the cost of importing products to the UK sky high. Now that interest rates are just wavering over zero it is likely that sterling is about to fall even further with it.

Britain’s largest bank, HSBC raised its interest rates recently on its more originally competitive tracker mortgage products just ahead of the Bank of England’s base rate cut.

The Monetary Policy Committee is anticipated to reduce the base rate by half a point to 1.5 per cent, which will be the lowest level 315 years.

Pre-empting this move Halifax suddenly increased the interest rate on their lifetime tracker mortgage products being offered to new customers.

First Direct who own Halifax also increased the rates on its finance products.

Melanie Bien, director of Savills Private Finance, the mortgage broker, said: “Several lenders have edged their tracker margins upwards in recent weeks to offset the likely interest rate reduction on Thursday. Other lenders, who have not adopted this stance, are likely to pull their deals and increase the margins on them. As usual, borrowers looking for a competitive tracker would be wise to move quickly. Millions of borrowers with base-rate tracker mortgages will automatically benefit if the Bank of England reduces interest rates tomorrow. A half-point reduction in the base rate would lower mortgage payments on a £150,000 interest-only deal by £62.50 a month. “

Further fears are fuelled that there could be another 75,000 homes which are repossessed in 2009 in comparison to 45,000 homes in 2008- the Government has just recently announced further changes to mortgage relief available for those claiming unemployment benefit.

The Support for Mortgage Interest scheme recently doubled its mortgage support funds to £200,000 and the waiting time to qualify for mortgage support was cut back from the original 39 weeks to 13 weeks.

Couples who are facing unemployment, particularly when one partner has lost their job so the other partner is the only income to the household will now qualify for the new Homeowner Mortgage Support scheme, a scheme that is still being finalised between the Government and lenders.

Soon struggling households who qualify for these schemes will see reduce repayments on their mortgages by being offered the opportunity to defer a portion of their interest for anywhere up to two years. It is expected that the Government will guarantee lenders against any losses should the borrower default.

For those who are elderly or for families the Mortgage Rescue Scheme offers the chance to take a shared equity option on their homes whilst household members remain as tenants in their property paying subsidized rent at a lower rate.

Banks are due to further reign in the amount of credit they are willing to lend to customers during the course of the next 3 months as they keep their credit approvals on mortgages, loans and credit cards at steady less risky levels.

Recent, Bank of England said the number of mortgages approved for house purchases had fallen in November to a record low at 27,000 loans arranged for customers – a 13% drop from the same time the previous year. However, an even larger drop in credit approvals is expected shortly.

Nationwide recently said it would not be passing any more base rate cuts to their tracker customers.

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The move by the building society, which was bailed out by the government’s £400 billion cash injection defied the pressure it was receiving from the Treasury to pass more of the central bank’s base rate cuts to its customers.

A spokesman for the Treasury said: “The Chancellor has repeatedly made clear that he expects lenders to do their best to help their customers through these difficult times.”

Chief economist, Martin Ellis at Halifax, said: “There was a 2.2% decline in average UK house prices in December. Continuing pressures on incomes and the negative impact of the dislocation of the financial markets on the availability of mortgage finance are expected to exert further downward pressure on the market. But a number of factors will help to support demand and should help to limit the down turn.”

Due to the current climate borrowers are forced into becoming more aware of their mortgage restrictions and thus now is the time that many of us are starting to see the full truth about the mortgage products we have taken out.

One of the main products that we are seeing the most restrictive of mortgage policies having a greater impact on people in the current climate are tracker mortgages – their very name would suggest (as many of us thought), that they did indeed track the base rate, however, strictly speaking, many of them do not. A few million tracker customers discovered the truth in their policy clauses when the Bank of England cut its base rates to significantly lower levels than have been seen since the Second World War.

Most of the banks will not be passing over the complete BofE rate cuts to their tracker customers due to special clauses that mean the bank has ensured it does not need to pass the BofE cut to its customers when the rates sink below a certain level.

In some cases mortgage customers had been aware of this at the offset but it now seems that many were not informed verbally of this vital clause when they took out their mortgage products.

It maybe that some banks genuinely felt that the base rate would never be at such a low level as to actually trigger the clauses into action. Halifax recently came under pressure from the FSA for not making clear all key financial information in each customers ‘key facts’ document.

As falling property prices put a halt to the withdrawal of equity as an option for most Britons the Bank of England reported yesterday that Britain’s are now being forced to pay off their mortgage debt at the fastest rate ever seen since the beginning of records 40 years ago.

For years the British have been able to boost their spending power through re-mortgaging to survive in a rising property market but this is no longer the case.

The Bank of England reported a £5.7 billion equity injection from people who were paying off their home loans during the third quarter of last year. There was a further £2 billion worth of repayment during the second quarter of the year.

Andrew Montlake, partner at the mortgage broker Cobalt Capital, said: Not so long ago an Englishman’s home wasn’t just his castle; it was his cash machine too. This is no longer the case. People are scared stiff of recession and rising unemployment and are now paying down their debts rather than adding to them. In this market, it pays to travel light. Of course, many people can’t take money out of their home even if they want to – any equity they had has either been wiped out altogether or seriously eroded by falling house prices. And even if they have got some equity left, there’s no guarantee they’ll be able to access it anyway given the stringent criteria lenders have now adopted.”

Howard Archer, chief UK economist at IHS Global Insight, said: “Housing equity withdrawal has been used significantly to support consumer spending in recent years. Consequently, the sharp turnaround adds to the already intense downward pressure on consumer spending. This reinforces belief that we are in for an extended period of very serious consumer retrenchment, which will be a major factor contributing to GDP contracting sharply in 2009.”