More help needed for homebuyers
Alistair Darling has been urged to do more to help mortgage banks lend to home buyers in his forthcoming pre-Budget report after figures revealed a 44% fall in the number of approved home loans since 2007.
New figures from mortgage lenders show that £18.7 billion was lent during October, up 7% from September but down 44% from the same month last year.
The Council of Mortgage Lenders (CML), which compiled the figures, says that despite the Bank of England cutting the base rate, lending remains weak.
Michael Coogan, director general of the CML, says: "Consumer confidence is now being affected by the worsening economic outlook. However, any recovery in lending is also being held back by the continuing shortage of mortgage funding.“
Coogan says Darling needs to announce “concrete steps“ in his pre-Budget report due on Monday 24 December, which will enable and encourage firms to increase mortgage loans. He also calls for the government to publish the delayed Crosby review into how to ease funding pressure on banks.
Find out what else can we expect to see in the pre-Budget?
Andrew Montlake, a partner at independent mortgage broker Cobalt Capital, says the figures offer further proof of how dire the situation has become.
"You have a double whammy where consumer confidence is shot to bits by a rapidly weakening economy and the mainstream lenders are only accepting 'quality' applicants with big deposits,” he explains. “I hate to say it but it could be some time before things start to improve."
New research shows that new borrowers are still not feeling the benefit of Bank of England base rate cuts with lenders continuing to increase their margins.
Data provider Moneyfacts says that both tracker mortgage rates and fixed-rate loans have increased despite 2% being shaved off the base rate since October.
Michelle Slade, analyst at Moneyfacts.co.uk, says only customers with at least a 25% deposit will be able to take advantage of lower interest rates as lenders are still only offering a small selection of deals to less risky customers.
“Lenders are in no hurry to return their tracker mortgages to the market, even though there is an increased demand for these types of deals,” Slade adds. “It appears that despite being urged to do so by the government, they have still not regained their appetite to lend.”
For example, the average loan-to-value (LTV) – the size of the mortgage compared to the value of the property – on a two-year tracker mortgage is currently 68%. Earlier this month, the average LTV was 74% and in October it was 77%.
According to price comparison website uSwitch.com, 16 key mortgage lenders have re-priced their tracker ranges since November’s base rate cut, with the average rate currently 5.24%.
Although this is lower than the average tracker rate in October (6.27%), it remains a whopping 2.24% above the Bank of England base rate. In October, the difference between average tracker rates and the base rate was a more modest 1.77%.
Lenders say they are unable to reduce rates further because the cost of funding remains high. However, the inter-bank borrowing rate (known as Libor) has come down following base rate cuts in October and November.
Moneyfact’s Slade says: “Lenders have been blaming the high costs of funds in the money markets for not bringing rates back down, but these rates have now started to fall. Mortgage rates are not following suit, even though the margin between base rate and Libor is less than it was before the October cut.”
Louise Bond, personal finance manager at uSwitch.com, says Libor continues to be a key influencer on mortgage rates. But she is optimistic that the gap between tracker rates and the base rate will start to close.
“New tracker mortgage customers can expect to save over £1,000 a year on the average tracker rate which is welcome news in this climate,” she adds. “Going forward, we expect to see further base rate cuts so these savings should get bigger.
“For people who are brave enough to enter the housing market in this climate, tracker rates should be considered as these rates are only going to go down over the coming months.”
Although a climate of falling interest rates tends to make tracker deals more attractive to borrowers, many will still be tempted by the security of fixed-rate deals where you know exactly what your repayment will be each month.
But Moneyfacts says the imbalance between the cost of funds and rates on fixed deals is even worse than on tracker mortgages.
Slade says: “The margin continues to increase. Borrowers should be able to benefit from fixing their rates at much lower levels by now, but the cuts aren’t filtering through.”
Lenders are also continuing to require bigger deposits from borrowers, with many 95% LTV deals being pulled.
With a tracker mortgage, the interest you pay is an agreed percentage above the Bank of England’s base rate. As the base rate rises and falls, your tracker will track these changes, and so rise and fall accordingly. If your tracker mortgage is Bank of England base rate +1% and the base rate is 5.75%, you will be paying 6.75%. Tracker rates are lower than lender’s standard variable rate (SVR) and as they are simple products for lenders to design, they usually come with lower fees than other mortgage schemes.
The London Inter-Bank Offer Rate is the rate at which banks lend to each other over the short term from overnight to five years. The LIBOR market enables banks to cover temporary shortages of capital by borrowing from banks with surpluses and vice versa and reduces the need for each bank to hold large quantities of liquid assets (cash), enabling it to release funds for more profitable lending. LIBOR rates are used to determine interest rates on many types of loan and credit products such as credit cards, adjustable rate mortgages and business loans.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.