Mortgage costs fall but market remains sluggish

Row of houses

The cost of fixed-rate mortgages fell in July, according to official figures, but the housing market remained subdued during the month.

Bank of England statistics show that the average interest rate charged by lenders during July on two-year deals was 6.36%, as long as borrowers had a 25% deposit to put down. This is down from an average rate of 6.6% in June.

This is the first monthly fall in average rate since February.

Nicholas Leeming, director of, says the news is a positive sign for the housing market and reflects the Bank of England’s loan scheme to lenders and cheaper wholesale funding.

“We can't rely on lower base rates while inflation looms large,” he adds. “So to see some lenders actually cutting their mortgage rates is a very positive sign and indicative of the recent reduction in interbank lending rate. It’s early days, but if lenders actually begin to pass on the benefit of previous cuts to mortgage borrowers, and competition returns to the market, we could really begin to see light at the end of the credit crunch tunnel.”

However, despite falling rates, the housing market remained sluggish during July. Figures from lenders, compiled by trade body the Council of Mortgage Lenders (CML), show the number of first-time buyer loans was down 8% from May, while home mover loans were down 9% in volume.

The average homebuyer put down a 22% deposit in June, up from 20% in May. The CML also reports that the average first-time buyer borrowed 3.33 times their income, down from 3.35 in May, while the average home mover borrowed 2.94 times their income, down from 2.97 in May.

In total, lending decreased during the month to £23.6 billion – down 4% from the previous month and down a whopping 32% from the same month last year.

Fixed-rate mortgages accounted for an increasing share of products taken out at 69%, up from 66% in May. The CML says this trend is likely to continue as fixed-rate prices have fallen in recent weeks.

Bob Pannell, head of research at the CML, says: “Mortgage lending activity remains relatively weak and will decline further in the coming months as a result of funding constraints and lower consumer demand.

“The majority of lending continues to be to people with larger deposits, which is prudent for borrowers and lenders in a slowing housing market.”

House prices

Prices on flats are falling at a higher rate than other property types, and are leading the downturn in the housing market, the government has warned.

Official figures show that average property price inflation was 0.6% in June 2008, down from the 3% enjoyed in the same month the previous year. However, between May and June 2008 there was a 0.7% fall in prices, with the 3.6% fall in flat values largely to blame.

Prices on semi-detached houses also fell 0.9% and terraced houses 0.3%, while owners of bungalows and detached properties felt some respite with 0.8% and 0.7% rises respectively.

The above figures are the national averages for the UK, but on a country-by-country basis the picture looks a little different.

In England, annual house price growth was 0.5% in June, compared to 5.7% in Scotland. Homeowners in Wales saw falls of 1% while those in Northern Ireland suffered a 9.4% fall in values.

Within England, the South East enjoyed the largest annual house price inflation (1.8%) followed by the East (1.5%), and London (1.4 %). Those in Yorkshire and the Humber saw rises of just 0.7%, while those in the North East and South West felt falls of 0.2% and 0.4%.

However, the homeowners worst hit are those in the North West (-1.1%), the East Midlands (-1.1%) and the West Midlands (-1.9%).

Another blow to the housing market has been the government’s hesitation over stamp duty reforms.

James Hyman, partner for residential sales at Cluttons estate agents, says the impact was immediate: ‘The possibility of avoiding this tax is too appealing to home buyers, who are reluctant to fork out tens of thousands of pounds for something they may be able to bypass in a matter of weeks, and as a result some buyers are stalling.’

Cluttons saw several purchasers on the point of exchange pull their offers in the hope the delaying would enable them to avoid paying stamp duty.”

Hyman adds: “With today’s high inflation figures, we are in real need of some good news to install much needed confidence back into the housing market.

“While the spike in inflation can be attributed to commodity prices, there is now a real danger that the latest news will result in a further delay to a reduction in interest rates next month.”

More about