More lenders slash rates
Mortgage lenders continue to cut interest rates, with Abbey one of the latest banks to slash costs by up to 0.25%.
Over the past few weeks, a host of banks and building societies have reduced the cost of their mortgage products to reflect the cheaper cost of wholesale funding. Last week, Woolwich and Halifax were the two biggest players to introduce rate cuts, and the repricing keeps on coming.
On Tuesday, Cheltenham & Gloucester introduced a major shake-up, with its lowest two-year fixed-rate mortgage now priced at 5.49% for people with 25% deposits and willing to pay a fee of over £2,000.
Today (20 August), Britannia Building Society has cut rates by up to half a percentage point, and tomorrow Abbey is reducing the rate on its fixed-rate mortgages, with two-year fixed deals now starting from 5.79% and three-year deals from 5.99%. However, borrowers must have deposits of at least 30% in order to secure these deals.
In light of Abbey’s cuts, both Halifax and Nationwide are expected to unveil further re-prices.
Although the lower rates should benefit many borrowers, especially those looking to remortgage, there has been little let-up in lenders’ tiered pricing, which rewards people with bigger deposits.
In fact, the trend appears to be getting worse. As part of its re-price, Britannia has introduced a new two-year fixed mortgage for people with 50% deposits. The deal is priced at 5.99% and has a £499 fee.
The equivalent product for someone with a 25% would cost 6.39% and for people with just 10% to put down, the deal would cost 6.79%.
David Hollingsworth, mortgage specialist at brokerage London & Country, says: “Where will it stop? Tiered pricing is still very much around and lenders are leaning even further towards people with larger deposits. Borrowers shouldn’t expect to see the best rates extended for people with 10% deposits for some time yet.”
Impact on borrowers
New research shows that, on an annual basis, the most competitive fixed-rate mortgage deals are, on average, still 0.64% higher than this time last year. This translates to repayments costing homeowners an extra £60 a month – or £720 a year – for a £150,000 mortgage.
Two-year fixed rates have increased the most (a rise of 0.87% over the 12 months) while five-year fixes have increased by 0.52% and tracker rates have moved up by 0.41%.
Francis Ghiloni, a director at mform.co.uk, which compiled the figures, says: “We’re living through a period of inflating prices and mortgages are no exception - 0.64% may not sound like a lot, but over the course of the year households will need to find an extra £720 to keep up with the cost of homeownership.”
The impact of higher mortgage rates compared to a year ago on borrowers is unclear, but alternative studies suggest that homeowners are simply cutting back on other areas in order to meet higher repayments.
A survey among mortgage borrowers by London & Country found that food prices have hit people’s pockets harder than mortgage costs, leading to 45% cutting back on the amount they spend at the supermarket.
The survey found that 45% were finding food and utility prices the biggest pain of the credit crunch, followed by 27% who felt petrol prices had hit them the hardest. In contrast, just 11% felt payment shock on mortgage payments was the biggest consequence of the economic downturn.
Mortgage providers have reported a turnaround in falling lending levels, with a slight increase in the number of house loans approved in July.
Despite mortgage lending still down by 27% since 2007, July did see a slight uplift with £24.8 billion lent during the month. This is a 5% increase from June, and is the first month-on-month increase since April.
But Bob Pannell, head of research at the Council of Mortgage Lenders, which compiled the figures, says the outlook remains bleak: “While there was a small month-on-month increase in activity, it represented a notable decline from a year ago.
“This continues the weaker picture seen in June and points towards the more subdued levels of lending we are likely to see in the second half of 2008.”
The low levels of lending reflect higher interest rates on loans and tougher criteria. Although rates are now starting to fall, criterion remains the biggest barrier to new buyers with lenders requiring them to have a deposit upfront.
Oliver Gilmartin, a senior economist at Royal Institution of Chartered Surveyors, says the figures do offer some encouragement for the housing market.
But he warns: "Mortgage lending is unlikely to recover in any meaningful way. [Despite lower interest rates] those without higher deposits have seen little benefit with many first-time buyers effectively shut out of the market.
“Despite the prospect of further interest rate cuts as the economy slows sharply into 2009, tighter lending standards look set to stay."
Other research, from Datamonitor, claims UK lending will fall by 20% by the end of this year.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.