According to the Bank of England the cost of fixed-rate mortgages increased in July 2009 to an average of 5.7% which compares with an average rate of 5.54% in June 2009. The result is that fixed-rate mortgages are at their highest since October 2008.
These changes to fixed rates are key indicators as to the health of our banking system. Despite efforts by the Government and the Bank of England to apply pressure on banks to lend at more reasonable rates we are seeing an increase in fixed-rates. This would suggest that the banks are paying a higher cost for fixed-rate funds in the markets – it is not just LIBOR to be considered here, each bank will have its own “credit rating” and thus the cost at which it borrows will be affected by its perceived risk rating in the markets.
There was an article a few months ago where a large corporate company actually had a better credit rating than the bank from which it used to borrow funds. The result was the company bypassed the bank as they could source funds at a lower rate than the bank. This is a classic example of where the bank’s credit rating is a key factor in the cost at which it borrows money and in turn the cost that they charge “us” for a mortgage.
But it is not just interest rates that are being affected. In the last month there has been a trend to lower LTV (Loan To Valuation) in the buy-to-let market. For example in June 2009 it was relatively easy to get a mortgage loan based on 75% LTV. By the end of July it was difficult to find banks who would lend at 75% LTV with most now offering 70% LTV maximum.
Overall it seems that the banking system and its ability to lend is still far from where it needs to be with no sign of a change in the near future. Until the banks can lend more freely we are going to see more pain in the property market. Right now it is still a tough market for the property buyer.
