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Credit rating impact of buying a property

September 23rd, 2009

Following the onset of the credit crunch banks took on a far more selective approach to help ensure that the risk rating of a potential borrower was acceptable to them.  This involved the bank conducting what is known as a “hard search” to ascertain the suitability of a property buyer. The problem is that the credit rating of the property buyer is adversely affected with every “hard search” carried out. As a comparison, a credit check carried out to assess the risk of a tenant is a “soft search” which does not impact this credit rating of the tenant (source: Credit-Check-Services.co.uk).

Of course none of this matters too much if you get an acceptable mortgage offer from the first bank you approach.  But for many people the first bank approached may provide poor terms, or worse still they may even decline your application, so you then approach another bank.  Each time a bank is approached with a request to lend another “hard search” is carried out, and with it another detrimental impact to the property buyer’s credit rating. Very soon the applicant’s credit rating starts to impact the bank’s perceived risk, thus the terms offered are even less favourable, and the risk of rejecting an application is greater.  The overall result is that it becomes increasingly difficult to get a mortgage with every new application made.

Such practices by banks are now being investigated by the Treasury Select Committee as MPs agree to launch a probe into this practice – and about time!  Clearly the banks are being unfair to consumers in restricting their opportunity to find the best mortgage by “damaging” a person’s credit rating every time they submit an application. It is expected that the Treasury Select committee will report back later in 2009, when we find out we will provide an update in our blog.

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Mortgage rates falling – HSBC and others

September 3rd, 2009

Great news for property buyers, mortgage rates are falling. 

Just as we were all starting to criticise the banks for their taking excessive profits by increasing their margins on mortgage interest rates we now see a surprise move by HSBC who announced a 1.99% mortgage offer.

But you have to read the detail that goes with this…..

  • There is an arrangement fee of £1,199
  • You need a massive 40% deposit. 
  • The rate tracks HSBC variable rate with a discount of 1.95%, so as rates go up in the next year or two then so will the 1.99% mortgage rate.
  • The discount of 1.95% is offered for 2 years, after that the rate reverts to HSBC’s variable rate (currently 3.94%). 

Overall though this is still a great deal from HSBC, and one that will certainly shake up the market. Already a number of other lenders have improved their mortgage offers, these include:

Woolwich (part of Barclays) trimmed their 2 year fixed product by 0.2% to 4.09%.  You need 30% deposit and there is a £999 arrangement fee.

Cheltenham & Gloucester trimmed their 2 and 3 year fixed products by 0.2% to 4.19%.  You need a 40% deposit.

Apart from the HSBC offer the reductions are still quite small compared with the falls in the cost of wholesale money (e.g. 2 year swap rates and LIBOR), but it is a move in the right direction.

Please note – we are not mortgage advisors, we simply publish what we find for your information, please speak to a regulated mortgage broker for advice.

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Buying a property with a tracker mortgage

August 31st, 2009

Historically buying a property with a tracker mortgage has been a good deal for those who can manage with their mortgage payments going up and down in line with the lender’s SVR or bank base rate. On average these tended to be a good deal for both the borrower and lender over a period of time. But it seems this is no longer to be the case.

 
The Sunday Times published an article (30/08/09) where they investigated the margins made on tracker rates in today’s market, what they found made for very interesting reading. On average lenders are charging £414 more per month on tracker mortgages than in January 2008, in effect the lenders have increased their margins over 3 month Libor which relates more closely to the cost of obtaining funds.

 
So today’s average tracker mortgage is now 3.07% higher than the Libor rate of 0.69%. Lenders are now making almost record profits with tracker mortgages. It also appears that many lenders are steering property buyers towards tracker mortgages by making the arrange fees / costs considerably higher for fixed rate mortgages.

 
Some analysts are now reporting that the higher costs of tracker mortgages could have a negative impact on economic recovery as it is effectively reducing the disposable incomes available to those with mortgages (the majority of the working population).

 
But perhaps there is an even bigger problem looming on the horizon. Some tracker deals have lock-ins, in effect if you redeem the mortgage in the next 1, 2, or 3 years you will have to pay penalty fees. With base rates predicted to increase (see our previous article here ) it means that tracker mortgages, and in particular bank base rate tracker mortgages, could become very expensive in the next 2 years. To put some figures on this, when bank base rates get back to 4% then the average tracker mortgage could go to 7% or more.

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Mortgage interest rate forecast

August 18th, 2009

In the last 6 to 12 months most people with mortgages have benefited from low interest rates, but this can not go on forever, there will come a time when rates increase again.  We have been reviewing comments from financial analysts and economists to understand what is likely to happen to mortgage interest rates in the next 2 years.

Firstly it is worth looking at those fortunate people who have been paying 0% (not sure if paying is the right word here) on their mortgage.  Typically those with Birmingham Midshires, HBOS and Co-op.  In most cases these were discount tracker mortgages where they tracked the bank base rate minus 0.5% or more – but with a minimum of 0% payable, otherwise the banks would be paying some people to have the mortgage!  These tracker rates will soon come to an end, most during 2009, after this the rates will revert to either the lender’s standard variable rate (SVR) or at a bank base rate plus a percentage.  Typically borrowers can expect their rates to recover to around a current level of 4% to 5%.

Key for almost all borrowers will be what happens to the bank base rate, currently at 0.5%.  We have been searching for analyst views on this and overall it seems to be good news for borrowers.  The mid point of views we found was from Deutsche Bank (George Buckley) who are forecasting that base rates will stay at 0.5% until mid 2010 after which they will increase to 0.75%.

More pessimistic economists are predicting that base rates will start to rise from late 2009, hitting 1.25% by mid 2010 and 4% by the end of 2011. The most optimistic are saying that base rates will remain at 0.5% until the end of 2010 before they start to increase in 2011.

Overall it seems that low interest rates will be around for another year but we all need to be prepared for future increases.  This could become a major issue for some, after paying abnormally low interest on their mortgage for a long period of time it may become difficult to adjust to paying “normal” mortgage interest rates of 5% or more.

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Cost of Mortgages Increasing

August 13th, 2009

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.

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Mortgages direct from lender

July 28th, 2009

The credit crunch has taken its toll on the number of mortgage products (in particular for buy-to-let) and naturally on the number of mortgage brokers. We have found out first hand the advantages of approaching a bank directly … read on.

In 2007/2008 there were 1000+ mortgage products, buy-to-let landlords and home buyers could obtain mortgages with ease using a self-certification income. Today the number of mortgage products has dropped significantly, and some banks are now offering products direct, not via a mortgage broker. The upshot is that many mortgage brokers will not be able to get you the best deal, you now need to do some more research yourself.

Whilst we believe mortgage brokers are a key resource for property buyers you should not rely on them exclusively, here is our case study:

  • Buy-to-let property mortgaged with the same bank for 10 years. An equity release was required to build up a fund to buy other properties.
  • A reputable mortgage broker was appointed to find a product. The offer was a tracker at BBR + 3% for 2 years, then revert to the lender’s SVR. There were admin fees and a 3% arrangement fee to pay. After 4 weeks the mortgage failed to complete due to a small technicality about the property freehold – banks often look for excuses not to lend.
  • Next approach was to the existing mortgage lender (should have done this first). They offered the same SVR interest rate for a remortgage equity release, and best of all only £255 in admin and legal fees. Note that this bank was no longer offering products through mortgage brokers, the advantage we had was the existing bank relationship and a known low-risk profile.

 Clearly this example does not apply to everyone, however it does support the view that approaching an existing bank with whom you have a proven history of mortgage borrowing could save you time and a lot of money in fees!

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Handelsbanken and Leumi Mortgages

July 26th, 2009

More foreign banks are joining the influx of banks to provide mortgages on UK residential property.  Yesterday we reported the Bank of China had entered the UK market, now we have learnt that Handelsbanken of Sweden and Leumi Bank of Israel are also now providing mortgages in the UK.

This is fantastic news for anyone seeking to buy UK property, especially for buy-to-let investors who are currently getting very poor deals from the British banks.  Here are some examples of what we understand is available from the non-UK banks:

Buy-to-let 3% over base rate tracker mortgages with 25% deposit

Lower arrangement fees, typically from £995

Buy-to-let mortgages based on 100% rental cover (most UK banks require 125% cover)

Leumi bank we understand is offering a tracker mortgage at just 1.625% above 3-month LIBOR, that is a current rate of around 2.56%.  This compares with the best UK bank rate of 2.95% from HSBC.

The fact that foreign banks are entering the UK market suggests that they now see it as very profitable to lend here, and maybe they see that property prices are at or nearing the bottom of the market – so for them, their loans are secure.

As to getting access to these loans you need to find an approved broker.  So far we have found the following can access the Bank of China mortgages:

  • Savills – 0870 900 7762
  • Legal & General Mortgage Club – 01226 230504
  • LargeMortgageLoansUK – 020 7519 4900

Maybe the tide has finally turned and we will soon see the big name banks on the UK high street offering mortgages at more reasonable rates.

Buy-to-Let investor looking for BMV Properties at discounts to todays valuation? << click here

Do you want to check tenant backround for financial risk? << click here

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Posted in Buy-to-Let, Mortgages

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Bank of China Mortgage

July 25th, 2009

We’ve been used to the proliferation of Chinese restaurants, now almost on every high street, then Chinese imports as their economy flourishes.  Now Bank of China Mortgages are here, maybe they see the UK as a great opportunity?

There has been much publicity regarding UK banks and the higher mortgages costs, lack of availability, etc, and we have blogged about them here.  but maybe, just maybe, the Bank of China could start to change the banking market for the better by introducing much needed competition and more cash.

The Bank of China will offer mortgages to both Buy-To-Let investors and homeowners, with mortgages starting at around 2.5% over BBR (which is an effective rate of 3% as at July 2009).  As yet we do not have details on the all-important loan-to-value (LTV) they will be offering, but it cannot be any worse then the UK banks are currently offering, and hopefully much better.

But dint think it is just a simple process of going to your current mortgage broker as they may not be able to access the Bank of China, it is understood that the mortgages will initially be brokered through Savills, and the Legal & General Mortgage Club.  Other brokers are expected to be appointed by the Bank, but it seems not all brokers will have access. 

Lets hope this move the the Chinese Bank will provide a much-needed shake up of the UK banking system and kick-start the mortgage lending to help with the recovery of our battered property market.

Here are some contact details of brokers providing access to mortgages with non-UK banks….

  • Savills – 0870 900 7762
  • Legal & General Mortgage Club – 01226 230504
  • LargeMortgageLoansUK – 020 7519 4900

Looking for buy-to-let properties?  BMV Properties at discounts to todays valuation? << click here

Before letting don’t forget to check tenant backround for financial risk? << click here

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Property remortgaging – beware

July 23rd, 2009

Some lenders are offering exiting property owners the opportunity, after their existing mortgage deal comes to an end, to remortgage onto what appear to be quite attractive rates.  Beware.

At first glance some of the mortgage deals look great.  A 95% LTV (loan to valuation), one year fixed rate of 3.59%, followed by the lender’s standard variable rate (SVR) of 3.99%. Sounds tempting doesn’t it?

The reality is that the new SVR being offered by lenders is often a much worse deal than the current SVR.  For example at Nationwide many existing mortgages are based on an SVR that tracks 2% over the bank base rate (BBR), thus you would currently be paying 2.5%.  The new Nationwide SVR being offered is currently 3.99%, a massive 1.49% higher!

The message here is to make sure you read the small print on not just the new mortgage offer, but also your current mortgage – you may find that you will be better off not changing your mortgage.  Remember, the banks are still licking their wounds following the onset of the credit crunch, they are keen to improve their bottom line profits, so check very carefully before you take up what appears to be a great offer.

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Lenders not playing fair on mortgages

July 16th, 2009

Today a report was published about the falling cost of money supply to banks which was not being passed on to property buyers seeking  mortgages. One of the key figures use to determine the interest rate at which a bank may borrow money in the markets is “3 month Libor (London Interbank Offered Rate), and this rate is now at a low of just 0.99%.  Whilst it is the bank base rate that normally catches the headlines it is Libor that has more influence on the cost of borrowing for banks.

So lets take a look at how much margin the banks are making from the homeowner struggling to pay their mortgage.  At the time of writing this article the lowest tracker rate available for mortgages was 3.25%, that is 2.26% above Libor, a much higher margin than was being charged pre-credit crunch.  And remember, the 3.25% was the lowest tracker rate we found for new mortgages.  But on average the tracker rates being offered by lenders is currently around 3.7%, and that is a huge 2.71% margin over Libor.

Overall at a time when the UK economy is in the midst of a severe recession banks need to be compelled to lend at fair and reasonable rates, not to take advantage of market conditions to maximise their profit margins. Lets hope our Government can bring some pressure to bear on lenders, which should not be too difficult with the very large tax-payer stakes held in some of the major high street banks.

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