‘Cheap as chips’ mortgages
Mortgages are now at their cheapest level since 2004, for borrowers able to put down deposits of 25% of more.
The latest research from mortgage banks shows that mortgage lending increased in March, with 31,000 loans approved during the month, up 29% from February.
Although the number of new home loans remains historically low – down 35% from March 2008 – the fact that the Bank of England base rate remains at just 0.5% means that mortgage costs are now at their cheapest levels for five years.
For people able to buy, the combination of low interest rates on new loans and lower house prices means their monthly interest payment now equates to 15.1% of their income, according to the Council of Mortgage Lenders (CML).
Bob Pannell, head of research at the CML, says: "Because the flow of lending is still constrained, there is a sharp dividing line in the housing and mortgage markets between those who can raise a substantial deposit and those who can't.
"For those who can, the burden of debt payments is low and mortgage interest is consuming proportionately less income than for a number of years.”
Deposits are, of course, still key. Borrowers need at least 10% to put down in order to qualify for a loan, and the bigger the deposits, the cheaper the mortgage rate. However, mortgage brokers say things appear to be improving slightly.
Until recently, the top mortgage rates were reserved for people with 40% deposits – i.e. borrowing 60% of a property’s value, known at loan-to-value (LTV).
But Melanie Bien, a director at Savils Private Finance, says the rate difference between 60% LTV mortgages and 75% has been narrowing of late.
“We are seeing more lenders offering better rates up to 75% LTV,” she adds. “The biggest difference in rate, however, can be seen when comparing 75% mortgages and those that go up to 90% LTV.”
This Friday, for example, Abbey is increasing the LTV on all its two, three and five-year fixed-rate mortgages from a maximum of 60% LTV to 70% LTV.
The new deals will have the same price but will now be available to more borrowers. At the same time, Alliance & Leicester (which, like Abbey, is owned by Spanish bank Santander) has launched a first-time buyer mortgage at 85% LTV.
Nici Audhlam-Gardiner, director of mortgages at Abbey, says: “We are committed to offering our customers the best possible deals.”
Bien says that while some lenders, like Abbey, are making efforts to tweak rates and gradually increase LTVs, the majority of mortgage banks remain stubbornly conservative about lending.
“These lenders are not doing anything like the amount of business they’ve done in the past or the amount we need them to be doing in order to help borrowers and the housing market,” she adds. “I do expect LTVs to keep on increasing, but this will take time - months rather than weeks.”
And David Hollingworth, mortgage specialist at London and Country, agrees that while Abbey increasing its LTVs is "very significant", it does not indicate an end to banks demanding big deposits.
Another new launch this week is a best-buy five-year fixed-rate from HSBC at 4.39%, with a fee of £999, on loans with up to 75% LTV.
But despite deals like these increasing competition in the market, Pannell warns that people must remember that costs will change over time and will increase going forward when the Bank of England eventually increases the base rate.
Which is why many brokers are recommending people opt for a fixed-rate mortgage of three or five years, rather than the more popular two-year fix.
Hollingworth adds: "If you are on a tracker mortgage paying a low rate, then it may seem like a wrench to move now onto a five-year fixed deal as your payments are likely to go up. However, over the longer term this is probably going to cheaper option."
For those without deposits to get on the property ladder, and the thousands of homeowners in negative equity and unable to remortgage, the fact that mortgages are currently ‘cheap as chips’ will not be much of a help.
"For those without substantial deposits, entering the market is still both difficult and uncertain,” adds Pannell.
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 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.
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.