Mortgage interest payments fall to record low
The monthly cost of mortgage interest repayments fell to the lowest level for more than five years in November, according to new figures from lenders.
Figures compiled by the Council of Mortgage Lenders (CML) show that debt burden has particularly reduced for home movers, who needed to use 10.6% of their income to cover their mortgage interest during November, down from 11.1% the previous month and 14.4% a year earlier.
Other than a brief low of 10.2% in the middle of 1996, the CML says this is the lowest debt burden on home movers since it started recording this data in 1974.
First-time buyers are also benefiting from low mortgage interest payments, spending 14.4% of their income in November, down from 15.1% in October - the lowest it has been since May 2004.
"It is encouraging to see that mortgage interest payments are so affordable for home movers and first-time buyers,” says Michael Coogan, director general of the CML.
The record-low Bank of England base rate (currently just 0.5%) has helped reduce mortgage interest payments, particularly for new borrowers and those able to remortgage onto new deals.
More homeowners are remaining on their lender's standard variable rate (SVR) – which tend to track the base rate – either because this is their cheapest option or their equity stake in the property is too low to remortgage. The CML’s figures show the number of remortgages fell 39% between November 2008 and the same month in 2009.
Coogan adds: "With refinancing still unattractive or unnecessary for many borrowers due to continuing low rates, we are now seeing a much more house purchase-focussed market, a profile much more like the beginning of the Noughties than its latter years."
The CML’s figures also show that lending volumes experienced a seasonal dip in November. However, the 53,000 house purchase loans (which represented a 4% decline on October) was up 66% on November 2008.
Loans for house purchase in November accounted for 60% of total new lending, the highest proportion since 2001. The CML reports that house purchase activity has grown considerably from the record low of 27% seen at the start of 2009.
However, low interest rates and tight lending criteria have meant that remortgage demand has gone in the opposite direction. From January 2009, the percentage of loans for remortgage has dropped from 53% to 31% in November.
Every mortgage lender has a standard variable rate of interest, or SVR, on which it bases all its mortgage deals, including fixed and discounted rate and tracker mortgages. When special deals come to an end, the terms of the deal usually state that the borrower has to pay the lender’s SVR for a period of time or pay redemption penalties. The lender’s SVR is, in turn, based on the Bank of England’s base lending rate decided by the Bank’s Monetary Policy Committee (MPC). Every time the MPC raises its rate, mortgage lenders generally increase their SVR by the same amount but when the MPC lowers its rate, lenders are often slow to pass this on or don’t pass on the full cut to borrowers.
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.