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Mortgage interest rates set to rise in 2010

January 7th, 2010

Market analysts are now predicting that even if the Bank of England base rate is not increased in 2010 many lenders are likely to increase their rates. Some analysts such as Stephen Noakes, Lloyds Banking Group, are looking at the market consensus on bank base rates, the view was “Bank of England will first raise interest rates in the middle of the year and that base rates will end up at 1.5% by the end of 2010”

So either way it would seem that all those with variable or tracker mortgages will see increases before the end of 2010.

One of the issues for lenders is that they are currently making losses by lending on low rates when their true cost of borrowing is much higher.  This is a situation that cannot last.

For those with buy to let tracker mortgages at rates of 3% to 4% over BBR this could see them paying as much as 6% by the end of 2010 with further increases in 2011.

It looks like 2010 is going to be an interesting year for the property market!

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Self Certified Mortgages – a thing of the past?

November 19th, 2009

According to government statistics the number of self employed people is approaching 4 million, and there is an increasing trend of self employed.  But now we have a situation where around 4 million self employed people are struggling to get a mortgage, so why is this?

Put simply the new FSA regulations place more stringent tests on lenders to assess the affordability of a mortgage by new applicants.  For self employed this involves such checks that make it almost impossible to obtain a mortgage, for example:

  • Self employed accounts going back several years – but what if you have only been self employed for 1 year?
  • Those working in partnerships or directorships need to show evidence of turnover and profits for the last 3 years.

All of this is really quite absurd.  For example, as a business owner I may choose to live off a lower income and “invest” what would have been my income in new employees to grow the business.  Those employees can apply for mortgages after a few months evidence of salary, but as the owner you cannot, for some reason you are a higher risk than the people you are employing.  The logic does not add up.

To coin a phrase often used by financial firms as mandated by the FSA [past financial performance is not and indicator of future financial performance] it is also true to say that “past employment is not an indicator of future employment”.  The PAYE employee could apply for a mortgage today and be made redundant tomorrow. 

The reality, it appears, is that the FSA are “over regulating” mortgage lending, the result will mean unnecessary hardships for some and an adverse impact on the property market as some homeowners simply cannot afford to move as they are unable to get a new mortgage.

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Mortgages available at 6 times your salary?

November 10th, 2009

Despite then difficulty many property buyers face in obtaining a mortgage there are some lenders who have been easing their criteria for borrowers.

At Aliance & Leicester they are currently (November 2009) offering up to SIX TIMES you annual salary based on the borrower earning £60,000 and having no other financial commitments.  This is a huge multiple considering the current difficulties in the financial markets.

Whilst Aliance & Leicester are the leading lender in terms of lending the most on multiples of salary there are some other banks who are offering fairly high multiples for the current climate.  One is Woolwich who are offering 5 times salary, and even the tax-payer owned Northern Rock is offering 4.5 times salary.

It seems that these higher multiples for mortgages currently being offered are based on new lending criteria where banks are placing more emphasis on affordability, e.g. understanding a borrower’s disposable income and the maximum lending that is safe to support. 

It also seems that LTVs are improving with 90% and even 100% LTV products currently available.  The only issue tends to be that the higher LTV mortgages carry a higher rate of interest, if you want the best deals you still need a sizable deposit.

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Why banks are not passing on cheap financing for property buyers

November 2nd, 2009

Apart from the cost of wholesale finance which we have blogged about earlier there is another factor coming into play.  The UK Government appears to be placing restrictions on state owned banks and influencing lending criteria at other banks in which the tax payer has a large stake.

One clear example is Northern Rock who last week were instructed not to appear in the top 3 for “best buy mortgages” until the end of 2011. Further Northern Rock was told it must also keep its savings balances below £20billion.  This move appears to be to “ease competition” in the market and avoid other banks complaining that Northern Rock is benefiting from being “state owned”.

Another example is Lloyds TSB who have been making deals less attractive in what appears to be an effort to “lose customers”. 

Royal Bank of Scotland is yet another example, last week it was reported that they were scaling back on mortgage lending.  RBoS have also increased some of the rates on their mortgage products, one example being the 5 year fixed mortgage which at the time of writing had increased from 5.99% to 6.39%.

A comment attributed one senior MP was “… pressure from Europe means they should not have competitive advantage” and that banks should not provide financing at rates which are “out of line with the rest of the market”.

Overall, whilst it is clear that the health of the banking system needs to be improved, it also raises some questions…..

  • If Europe is concerned about competition affecting banks and asking state owned banks to be less competitive, then why are many banks already reporting higher levels of profits and bonus payments?  
  • Do the non state supported banks really need more help to reduce competition?

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Barclays – Woolwich – mortgage rates cut

October 22nd, 2009

Some good news for property buyers with new announcements made about cutting mortgage interest rates.  It would seem that market competition is starting to increase which should be welcome news for most borrowers.

Specifically the Woolwich (part of Barclays) has announced cuts of 0.6% on its 3 year and 5 year fixed rate products. If you can afford a 30% deposit then Woolwich have announced a 2 year fixed product at 3.79%.

Other banks are also cutting rates on their products, these include the Nationwide and Cheltenham & Gloucester (part of Lloyds TSB).  Even the state-owned Nothern Rock has got in on the move to cut rates, for those with 20% deposit they are offering a 2 year fixed rate of 5.69%.

In almost all cases lenders do charge fees, typically in the range £500 to £1,000. 

We do not offer any advice on mortgage products in this blog, but with rates starting to improve it could be a good time for some to discuss their options with an FSA approved mortgage broker.

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FSA mortgage regulation – guidelines on assessing expenditure

October 21st, 2009

We have been taking a closer look at the FSA regulation being considered to reduce the risks in providing mortgages that may subsequently fall into arrears and have found a detailed list put forward as guidelines for lenders.

Expenditure is determined for the mortgage applicant and their dependants using 3 areas of assessment; committed expenditure, personal expenditure, and contingency expenditure.  Below is the detailed list of areas to be assessed.

Committed expenditure

Income tax and NI
Servicing of existing secured and unsecured debt
Utility bills and other household bills
Council tax
Service charges or land rent
Shared ownership rent
Cost of investment vehicle to repay interest-only loan
Insurance premiums
Pension contributions
Nursery/college/school/university fees
Alimony and maintenance payments
TV license and communication
Regular savings
Other existing commitment

Personal expenditure

Food and drinks
Alcohol and tobacco
Clothing and footwear
Household goods and services
Health and personal care
Transport
Recreation, culture, restaurants and hotels
Holidays
Other miscellaneous goods and services

Contingency expenditure

Prudent allowance for any missed or understated
expenses

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FSA mortgage regulation – a step too far?

October 20th, 2009

Many industry professionals and analysts are starting to comment on the FSA regulation aimed at helping to ensure more responsible lending.  From the many comments made so far the regulation seems to be not fully thought through and will almost certainly have consequences that (hopefully) the FSA did not intend.  Here are some examples:

A self-employed person with variable income may no longer qualify for a mortgage, even though the future income is more secure than many in salaried jobs which could be at risk from redundancy.

An existing mortgage holder wanting to downsize their home and “reduce” their mortgage commitment may no longer be able to do so if they not meet the new FSA guidelines placed on banks. Is this not crazy, surely reducing the mortgage commitment actual reduce their risk of default?

An existing mortgage holder, that does not meet with the new financial guidelines, may end up “stuck” on an unattractive interest rate as they do not”qualify” for a remortgage onto a more favourable interest rate.  The regulations could allow banks to exploit this to maximise their margins!

These are just some of the examples we have seen being discussed.  Hopefully the FSA will provide further clarifications (or revisions) to their lending guidelines, if not then many more people could suffer financial difficulty at a time when we need to support them.

Based on the feedback and analysis we have seen the FSA regulation, as currently reported, does seem to be a step too far.

You can read more details on the FSA Press Release here … http://www.fsa.gov.uk/pages/Library/Communication/PR/2009/140.shtml

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Mortgage ‘spending checks’, good or bad?

October 19th, 2009

The FSA are to announce that lenders must take greater measures to evaluate the spending patterns of customers before providing them with a mortgage. Is this a good or bad thing?

It is clear that in some cases people who take out mortgages will “over spend” their budgets, and there is an argument that such people should be “protected” from taking on a mortgage that they will most probably be unable to pay at a later date.

There is also an argument that this is a step to far, it intrudes into personal lives, surely how we choose to spend our money is private.  Also whilst current spending habits maybe be considered acceptable to banks, these can change, for example a change in family circumstances by financing a son / daughter through university, getting married, getting divorced, etc.

Maybe we are once again seeing centralised over-regulation as a panic reaction.  We are already increasing regulation for banks to lend more responsibly, do we need to extend this into the personal lives of everyone who wants to borrow?

What about alternatives, it seems to me that regulation of credit card facilities could be far more effective.  Maybe there could be a cap on total amount (relating to income) that an individual can have outstanding on their credit card?  The cost of a small credit card loan can soon become as expensive as a mortgage on a property.  For example:

  • Credit card debt of £20,000, interest rate of 25%, gives net cost per annum of £5,000
  • A mortgage of £100,000, interest rate of 4%, gives a net cost per annum of £4,000

This is a simplistic example but it clearly illustrates that credit card debt is far more costly to consumers and with the ease with which lenders provide these facilities then it is always going to expose the more financially vulnerable to risks at some later date.

In conclusion, maybe there should be a greater focus on the unsecured lending market where it seems all too easy to obtain credit at very high interest rates, such credit can seriously impact those who are less able to manage their spending.

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Buy-to-let mortgages, the future costs could be higher

October 14th, 2009

For over a year now it has been tough to get buy-to-let mortgages, banks have set ever higher hurdle rates for new lending; reduced LTVs, higher rental cover, and caps on the maximum number of mortgages provided. 

We took a cross-market sample of buy-to-let mortgages on offer as of 12 October 2009 to assess some of the implications, this is what we found.

  • Average interest rate 4.77%, for the first 2 years.
  • Average arrangement fees of 3.1%
  • Average LTV 68%
  • Average mortgage rate of BBR + 3.5% after 2 years.

So what does this tell us? Firstly, for the headline rates being offered of 4.77% you need to add on the arrangement fee of 3.1% averaged over 2 years, in effect giving a net cost of 6.42%. 

  • Averages allowing for fees gives an interest rate 6.42% with LTV averaging 68%

This is an extraordinarily high rate of interest given the actual BBR of 0.5% and 3 month LIBOR averaging at less than 2%.  It seems banks are “milking” buy-to-let investors, especially when you consider the average of 6.42% interest comes with an average LTV of 68%, it seems that premium interest rates are being charged for very secure mortgages.

But it is the longer term that could be of more concern.  Typically the average buy-to-let mortgage today will revert to BBR + 3.5%.  This works out at 4% based on today’s BBR of 0.5%, which seems reasonable.  But within a few years, not long after the typical initial 2 year mortgage lock-in period, BBR could be at 2% or more, thus borrowers could be paying 5.5% minimum, and this could rise to around 9% if we go back to the “normal” mortgage rates of just a few years ago.

In summary, the typical tracker mortgages with BBR +3.5% (or more) may seem cheap today but you could be locked into a very expensive mortgage as the bank base rate starts to rise (which it will) – so make sure you look after your “credit profile” should you wish to re-mortgage away from one of these products in a few years time.

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Mortgage tracker deals ending

October 13th, 2009

Two years ago many lenders were offering some incredible tracker deals with rates tracking the bank base rate very closely, and in some cases at a discount to the bank base rate.  The result has been many of those with base rate trackers from 2007 have been paying very low (in some cases zero) mortgage interest.  But all good things come to an end.

The question for many people as they exit these two year tracker deals is this; do they stay with their existing lender and their SVR, or look for a mortgage elsewhere?

There are many factors to consider here, one being whether you need the security of a fixed rate mortgage knowing what your monthly outgoings will be, or whether you want to go with a variable rate product.  Before making a decision it is best to read up on what the market thinks will happen with mortgage rates, and also take the advice of a good mortgage broker / financial advisor.

At this time the SVR for many lenders is below 4%, in some cases less than 3%.  If your view is that interest rates will remain low for years to come then maybe the SVR product is best for you.  If you think the interest rates will rise and soon be back to the 5% plus levels then maybe a fixed rate at sub 5% is good for you – it is a choice based on your circumstances. 

We do not offer mortgage advice on this blog but you will find much information relating the UK economy and views on where interest rates are heading. At the end of the day it is a personal choice as to which mortgage product you choose, but for me I like tracker mortgages, my own view is that it will be some time before base rates rise significantly, so for now I am keeping away from fixed rate products.

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