Mortgage drought spells more woe for buyers
Borrowers struggling to get a mortgage should not expect things to improve anytime soon, despite figures showing mortgage lending increased during January.
Following the run on Northern Rock in September, mortgage lenders have pulled products, put up their prices and become more picky about who they will lend to. This is in response to tougher market conditions, a slowdown in the housing market and difficulty securing funding.
However, figures from mortgage lenders, collected by trade body the Council of Mortgage Lenders, show that lending in January increased to around £26.5 billion. This is up from £23.9 billion in December.
The CML says the rise is significant as lending normally slows in January. However, it warns that the amount of money banks are willing to lend in the months ahead will be lower in the months to come.
Michael Coogan, director general of the CML, said: “There is considerable uncertainty in the housing market at the moment and we expect lending volumes to be lower in the coming months.”
The CML predicts that most lending over the next few months will be for remortgages rather than house purchases, as people are deterred from buying property because of the high cost of moving. Coogan added that the government could address this issue by cutting the rate of stamp duty in next month’s Budget.
Lower interest rates are also likely to encourage the recovery of the housing market. In February, the Bank of England’s decision to cut rates was unanimous but despite predictions of another rate cut soon, this is not a given.
The economist’s view
Earlier this week Kate Barker, an economist and a key member of the Bank of England committee that sets interest rates, warned that home owners should brace themselves for falling house prices.
She also admitted that the slowing housing market currently presents the greatest risk to the UK economy, stating: "The risk I believe to be of most concern is around the interplay between the property market and the financial sector resulting from the credit turmoil."
Barker said that the biggest constraint on the housing market is lenders' unwillingness to advance home loans to buyers. She warned that if mortgage lenders
continue to struggle to get funding, then mortgages are likely to
become more expensive.
Barker said: “…The mortgage market
could become less competitive and more expensive, feeding back into a
decline in the housing market, somewhat lower consumer spending, and
also into lenders’ balance sheets, reducing lending capacity further.”
Despite refusing to rule out further falls in house prices, Barker pointed that this would leave only a small minority of home owners in negative equity.
She added: "The large rise in house prices over the past decade has resulted in high levels of housing equity, [therefore] there should be ample opportunity to borrow against housing equity for many even if house prices were to fall – in general the level of housing equity may be more important than the direction of change in house prices.
"It is worth noting that it has been calculated, on a very pessimistic assumption of a fall in house prices of 15%, that only 5% of mortgagors (around 2% of total households) would find themselves in negative equity."
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
The circumstances in which a property is worth less than the outstanding mortgage debt secured on it. Although it traps householders in their properties, the Council of Mortgage Lenders (CML) says there is no causal link between negative equity and mortgage repayment problems. At the depth of the last housing market recession in 1993, the CML estimated 1.5 million UK households had negative equity but most homeowners sat tight, continued to pay their mortgages and eventually recovered their equity position.