Mortgages Uncovered

Last year mortgage lending activity halved and had reached its lowest level since 1974 says latest data from the Council of Mortgage Lenders.

516,000 home purchase loans were taken during 2008, since 2007 that is a decline of 49%
In December 2008 only 32,000 hone loans were made which is a drop of 5% from November and the worst seen in 6 years.

Director General of CML, Michael Coogan, said:

“The shortage of mortgage funding and reduction in the number of active lenders has reshaped the mortgage landscape in the space of a year. This low level of transactions is insufficient for the functioning of an efficient market. Measures are now in place to seek to restore the flow of funding to the mortgage market, but this will take time to feed through. Further action may still be necessary to increase transactions, stabilize prices and restore confidence.”

The figure for remortgaging customers dropped by 26% since November to only 40,000 loans made in December, this suggests that due to restrictive lending criteria many borrowers opted to stay on their own current deals.

12,100 loans were made to first time buyers in December collectively worth £1.4 billion which were the lowest figures since month records started in 2002.

Changing economic conditions has meant that there has been a lot going on with self cert mortgages over the last 12 mths, this is a brief overview.

The reason for ‘Self-cert’ was to allow mortgage applicants to ‘self certify’ their income with no proof of the figures needed of the applicants salary. Now though there is an increased risk to lenders because of higher rates of interest. It used to be the case that a self-employed mortgage customer with a good credit history could borrow around 90% of their property’s value and someone in the situation who either had a record of missed mortgage payments, or defaults and CCJs would get around 60% of their property’s value. There were often various other restraints placed on this type of mortgage such as redemption penalties and harsh tie in periods.

These mortgages were originally designed for a reason – to provide a product for the increasing number of people who are self employed with a fluctuating income or an income that was difficult to prove maybe due to late accountancy records or other reasons.

All this made sense for the increasing number of self employed people who were taking mortgages but now the bottom has fallen out of the housing market and people with self cert mortgages are stuck on expensive mortgage deals, banks have almost completely stopped offering self cert mortgage products due to risks what is to happen to the self employed in the future who want a mortgage? Is this the end of an era?

LloydsTSB are sponsoring the Olympic and Paralympics Games in London during 2012 and in line with this the bank are set to launch a new mortgage offer.

The mortgage which will be a three year deal includes £100 discount on the product fee which is donated directly to the British Olympic and Paralympics Association.

The new mortgage product is being marketed in Lloyds TSB and Cheltenham and Gloucester locations and branches will display 2012 Olympic promotional material along with the new deal.

Marketing Director of Lloyds TSB Mortgages Stephen Noakes, says:

“This deal allows homeowners to use their essential mortgage spending to make a financial contribution towards the future success of our athletes, at no extra cost to themselves. The discounted fee and market leading rates means this is one of the most competitive three-year fixed rate mortgages available.”

The sponsorship deal of the London Olympics is estimated to be £80 million.

Then on Tuesday February 10th, former HBOS bosses informed the Treasury Committee that they had made mistakes during their handling of the global recession. Former chairman of HBOS, Lord Stevenson, declared the bank failed to predict the credit crunch which meant that any access to additional funds had been frozen.

There are literally millions of borrowers with tracker mortgages who will be facing a repayment shock which could be anything up to £7,000 a year, even despite the BofE interest rate falls to a new low of 1% last week.

Severe jumps in repayments will hit many thousands of borrowers, some of whom are paying 0% on their mortgages.

It is expected that their monthly repayments could leap by eight times — which could mean jumps of less than £100 a month to over £600 on a £200,000 loan when their deals are due to expire.
Richard Morea of broker L&C Mortgages said:

“The shock is inescapable — those on super-low rates need to be ready. Even the cheapest remortgage deals are at 3%.”

Should you consider moving your mortgage if you are in this position then HSBC is offering a great two year fixed rate of 2.99% which comes with a fee of £599 should you have a 40% deposit.

However, Ray Boulger of broker John Charcol said: “The worst of the recession is unlikely to last beyond 2010 and I believe rates should rise in 2011. Those coming off two-year fixes then could wish they had fixed for longer.”

Northern Rock s making a bid to get itself back into the mortgage market as it dropped its mortgage rates by 1% in the last two weeks.

“It is good news for the mortgage sector that Northern Rock is back in business as it will increase the number of lenders,” says Francis Ghiloni, business development director at Mform. “In the old days of a year ago, Northern Rock had 25 per cent of all lending, so its departure was a serious blow. But these deals aren’t yet entirely good news for borrowers as its best deals are reasonably competitive but not that competitive. The Rock isn’t on a roll yet, but the genuine good news for all borrowers and the market is that signs of normality are being detected.”

Jemma Rundle, a spokeswoman for the Rock, says: “We’ve made no announcement on changes to new lending. Our business plan is under review and we are reacting to the market and our competitors, but there are no dramatic changes taking place right now.”

Sean Gardner of price-comparison site MoneyExpert.com commented “In general, its savings deals are above average,” he notes. “They are improving and the Rock doesn’t seem as keen to follow the downward trend we are witnessing elsewhere. I expect them to stay in the top quarter of the market for savings rates in a bid to revive the brand.”

Those mortgage borrowers who are going to stay with their current lender when their deals have expired will reap most of the benefit from the recent rate cut.

However, those people who are seeking a new mortgage deal may well find that they have little choice from the rates lenders are offering.

Nationwide, Halifax, Lloyds TSB, Barclays and Skipton reduced their (SVRs) literally in minutes of the announcement of the last half point rate cut.

Those people who are on their lender’s SVR rate could be paying as little as 3% on their mortgage.

Melanie Bien, director of Savills Private Finance, the independent mortgage broker, said “the sharp drop in banks’ funding costs had already led to cheaper fixed rate mortgages. It was unlikely that these would fall much lower as lenders did not need to be as competitive as they have in the past. Lenders are more concerned with improving margins and rebuilding their balance sheets than trying to offer the cheapest rate on the market”

“The rate cut is an assault on savers who will have seen their interest payments drop by 83 per cent since July 2007,” said Adrian Coles, director general of the Buildings Society Association.

Just recently the Abbey has been increasing their market share with new mortgages.

Now the building society say that they are accountable for 28.9% of any new net mortgage lending in 2007, which is a huge rise in comparison to the 8% it had in 2007.

Abbey is the UK’s 2nd largest mortgage lender and it is said that their pre-tax profits have jumped to over 20% last year to a staggering £991million (1.1 billion euros), which is up from £822 million (924 million euros) during 2007.

Owned by Spanish banking group Santander who also recently announced their annual profits of 8.9 billion euros (£7.9 billion), which is up 9.4% from 2007.

Santander was not exposed to the toxic US subprime assets; so therefore, it has not really been affected as much as other banks during the current crises.

Now that the mortgage market is shrinking in the UK, Abbey has taken full advantage whilst rivals such as Northern Rock continue to withdraw their new mortgage products from the market.

A spokesman for Abbey also said

“we have seen an increase in savers turning to the bank. It opened 572,000 new accounts during the year, saying it is perceived as a safe haven for UK depositors”.

Recent falling rates don’t only mean spare money for many, but also provides the opportunity to chip away at the largest debt it is likely that you have.

There are very clear advantages to paying extra toward the amount you owe on your mortgage, whatever type of mortgage you may have.

According to Melanie Bien at Savills Private Finance; “a monthly overpayment of just £100 on a £150,000 with 25 years to go at a rate of 4.5% would shave three and a half years off the term and save a hefty £20,000 in interest.”

HSBC, keen for borrowers to realize this benefit, is writing to 30,000 of its tracker and variable rate mortgage customers to encourage them to overpay on loans. “There is a danger for homeowners in allowing their lifestyles to become accustomed to current low rates,” says Martijn van der Heijden, HSBC’s head of mortgages. “Interest rates will increase at some point and it will feel painful for those borrowers who have soaked up the benefit of lower mortgage payments by extending their spending habits.”

Is there a catch to overpaying?

“Some lenders only allow you to make overpayments during certain months of the year,” says Morea. Others, such as Alliance & Leicester, impose their own restrictions. If you overpay by less than £500 a month on its mortgage deals, it won’t deduct this from your mortgage balance until the end of the year, says Bien. But if you pay more than this sum, the overpayment is taken off immediately. So find out when the overpayment will be applied to your balance: if it’s at the end of the year, there’s little point in making it until then – you’re better off sticking the sum in a savings account.

Mortgage lending actually doubled in December 2008; however, the figure was only quarter of what it was 12 months before claim Bank of England.

Net lending, which strips out redemptions and repayments, was £1.9bn during the month – up from November’s depressed level of £834m. But the figure was well down on December 2007, when net lending totaled £7.72bn.

“The level of mortgage approvals was still the second lowest since comparable records began in 1993, and followed a particularly dismal performance in November,” said Howard Archer, chief UK economist at IHS Global Insight. “At this stage we would infer no more than mortgage activity may be stabilizing at an extremely low level.”

Andrew Montlake, with independent mortgage broker Cobalt Capital, said borrowers were still struggling to raise loans. “The fact remains that the mortgage market has gone from one extreme to the other. We’ve gone from over-exuberance to overreaction and many lenders have still got the shutters firmly down.”

The BofE reported a big slowdown in consumer credit during December 2008 when consumers starting to rein in borrowing on loans and credit cards. British Bankers’ Association released figures recently that uncovered traditional pre-Christmas borrowing had been replaced with a focus on saving.

Mortgages approved for new house purchases went up slightly in December 08 due to bargain hunters crabbing cheap housing deals, however, but the shares in building societies dropped sharply on the stock market.

31,000 mortgage providers has home loans approved last month, which is up from 27,000 in December, although it was a fall of 56% from December 2007 say Bank of England.

Experts are still quick to point out this is not the recovery of the housing market.

Howard Archer, of IHS Global Insight, said: “At this stage, we would infer no more than mortgage activity may be stabilizing at an extremely low level. The data may be a sign that banks are gradually becoming more prepared to lend, [but] mortgage lending levels are still very weak.”
Separate figures from the Building Societies Association show that lending by mutuals more than halved from £2.2 billion in November to £1 billion in December.

Simon Rubinsohn, chief economist for the Royal Institution of Chartered Surveyors, said: “The pick-up in activity reflects in part the increased interest from buyers who are being attracted to the market by the fall in house prices and drop in mortgage rates. Interestingly, the increased supply of mortgage finance in December came exclusively from banks, while both building societies and other lenders remained on the sidelines.”