Mortgage & Financial Services News

The proportion of mortgages being taken out for purchases, as opposed to remortgages, is at its highest level for years, although the actual number of purchase mortgages has sunk.

The latest mortgage index from John Charcol reveals that six out of ten mortgages are for purchases.

Drew Wotherspoon, director of marketing at Charcol.co.uk, said: “For the first time in what we believe is decades, the proportion of mortgages for purchases broke the 60% barrier in July, revealing a certain confidence in the future of the market.” 

He claimed: “There is much talk of a double dip and a large correction in the housing market still to come, but these figures would certainly go some way towards questioning this theory. 

“The rule book may well have been ripped up when the crunch began, but the old adage of supply and demand still holds true. While we have limited new stock, demand will always outstrip supply in the UK. 

“The last few years have taught us to expect anything, but a further large drop in prices looks very unlikely, unless the FSA’s proposed rules on affordability are implemented as currently drafted.”
 
The independent mortgage advisers expect remortgaging to remain in the doldrums. Just two years ago it accounted for 75% of the market, but it is now just 40%. 

Wotherspoon said: “With tightening of lender criteria and many people reverting to reasonably attractive rates, there is little surprise in this, but borrowers should definitely keep their eyes on the ball. Logic dictates that a move in bank rate will spur some people into action, but many shouldn’t wait for that. Increasing numbers of borrowers would be better off if they moved.

“But even with the improvement in pricing of fixed rates recently, borrowers are showing little signs that they believe it is time to take long-term security. 

“Despite the best attempts of some market commentators to scare borrowers by suggesting we could have 8% interest rates soon, variable rates are still, in our opinion, the product of choice.”

He added: “For the record, we would be surprised if bank rate was anywhere near that level by the end of 2015.”

The index also showed that the number of first-time buyers increased by 80% in one month, although Charcol is wary of drawing too many conclusions from that.

“This is the highest level since February and perhaps suggests that first-timers are willing to dip their toe into the market again after sensibly putting any plans on hold pending the outcome of the election and subsequent emergency budget,” said Wotherspoon. 

“However, one month does not make a trend, but it will be interesting to see over the coming months if the trend does continue.”

The John Charcol Mortgage Index is published monthly, tracking statistics based on mortgage business written by the company. As such, its figures are more current than those reported by the Council of Mortgage Lenders and the Bank of England which are based on completions, which typically take place two to three months after the mortgage application is submitted.
 
The three statistics tracked each month, based on the number of cases submitted rather than the mortgage amount, are the percentage split between fixed rates, capped rates and tracker/discount rates; between purchases, remortgages and product transfers; and of first-time buyers compared to all purchasers.

* While Charcol says the proportion of mortgages taken out for house purchase has risen, the actual number has fallen. Mortgages approved for house purchases fell in July to 33,698 – down by 877 from June, according to the British Bankers Association.

This was the second monthly fall in a row, and compares with the high of 45,415 home loan approvals last December.

Gross mortgage lending by the major banks was slightly below the average of the last six months, at £8.4bn in July.

People are looking to repay their mortgage while interest rates are low. Net mortgage lending, which strips out repayments and redemptions, increased by just £1.95bn. This was the second-lowest rise since February 2001.

“Gross mortgage lending remains stable, although demand for mortgages continues to be subdued. The greater availability of properties for sale and slowing house price growth have not yet fed through to increased house purchase approvals,” said BBA statistics director David Dooks.

Leeds Building Society has re-entered the self-build market with the launch of a new variable product specifically designed to help people build their own homes.

Funds are released in five stages, which are Land Purchase, Wall Plate, Roofed In, Plastered Out and Completed. The Society will release up to 75% of the value for each stage, which is extremely beneficial to self-build customers both in terms of managing their outgoings and cash-flow. Borrowers only repay the amount they have borrowed and can access funds at each stage of the build.

Phil Coombes, Head of Intermediary Sales at Leeds Building Society said:

“It is often very difficult to predict and budget exactly for five stages. Purchasing the land will usually be the biggest expense and we will lend up to 60% of the value with outline planning permission and 75% with full planning consent. The flexibility of our self-build product means the process is made much easier.

“Furthermore, we will lend up to 75% LTV on the completed property (stage 5), so customers only have to find 25% of the value throughout the process.”

The mortgage deal is a two year variable, currently at 6.19%, after which the borrowers can transfer to another deal. There is no higher lending charge and fixed fees of only £999.

Phil added:

“Funds are released following an inspection by a qualified surveyor or valuer and sent electronically. Consequently, borrowers receive the money quickly when required and they do not pay any interest until they have received the funds.

“This, combined with the ability to borrow up to 75% of the value at each of the five build stages makes this a very attractive proposition.”

The latest Rightmove Consumer Confidence Survey finds that the proportion of people that expect prices to be higher one year from now has dropped from 50% to 41% since last quarter.

This view, taken from more than 20,000 prospective home-movers, comes against a backdrop of Rightmove reporting new sellers’ average asking prices falling month-on-month for the first time this year.

Despite a combination of factors exerting downward pressure on prices during the second half of 2010, overall a bullish majority of 75% believe that prices will either be the same as now or higher by July 2011. This has fallen back from the 83% recorded in our April survey, however.

The results are taken from responses to our regular quarterly question - “Where do you think average house prices will be one year from now?” - providing a first major insight into the property market outlook of potential home-movers since the change in government and announcement of austerity measures.

Miles Shipside, commercial director of Rightmove, comments:

“A 9% drop in people expecting prices to be higher in a years’ time is a significant shift. However, three-quarters of people still believe that prices will either be the same or higher in 12 months’ time, indicating expectations of price stability in the medium-term.

“This suggests that either the Government cuts have not yet bitten hard enough to knock the inherent belief in property as a long-term safe-bet, or that there is a strong sense that the property market’s ‘dark days’ are behind us.”

Overall the survey indicates a degree of confidence that the new Government’s austerity measures will be bearing fruit in a years’ time. The medium-term view of the majority of respondents appears to be that by next summer the immediate concerns of property oversupply, mortgage famine, and the personal financial pain of the recovery process, will have eased.

However, one in five believe prices will fall over the next year, and this ‘nervy minority’ has increased from one in eight last quarter.

Shipside adds:

“The ‘price-optimists’ still out-number the ‘price-nervy’ by two to one, but with austerity measures starting to bite, a growing nervousness is to be expected. Given that house prices are anticipated to fall in the second half of 2010, it is reassuring that a bullish 75% believe that house prices will recover to be the same or higher by the summer of 2011.

“This is largely dependent on the return of mortgage availability which, unfortunately for frustrated would-be home-movers, may prove to be a longer game than they anticipate.”

Confidence levels across each region appear broadly similar this quarter. Respondents in East Anglia, where new sellers’ average asking prices are currently -1.4% year-on-year, are the most confident of higher prices (45.3%). For the second successive quarter London sees the greatest proportion forecasting lower prices (23.3%).

Predicting the market

The Rightmove Consum er Confidence Survey reports the views of more than 20,000 people, making it the largest quarterly survey of its kind in the UK and an invaluable means of measuring public sentiment.

Matthew James, consumer and market insight manager at Rightmove, comments:

“The Rightmove Consumer Confidence Survey measures sentiment, an early indicator of the trends that we can expect to see a bit further down the line and evidence of this can be found by comparing our survey results of one year ago with Rightmove’s most recent House Price Index.

“And looking ahead, there is an interesting test coming for home-movers around price confidence as recent announcements of austerity measures and cuts start to be put into practice. It will be fascinating to see how resilient this confidence proves to be.”

A base rate of 0.5% will begin to look like the ‘new normal’ with hikes unlikely until 2014, according to a leading economic forecaster.

The Ernst & Young Item Club said rates would need to be kept low to counter-balance the Government’s spending cuts.

Professor Peter Spencer, ITEM’s chief economic adviser, added the Bank may even have to restart its £200bn quantitative easing programme, the Telegraph reports. 

He said: “Monetary policy [will have to] remain very loose in order to offset the dampening effects of fiscal policy. Further asset purchases cannot be ruled out if there are signs that the recovery is relapsing.”

ITEM’s interest rate forecast is in contrast to that of the Office for Budget Responsibility (OBR) which says rates will rise next year and reach 3% by 2014.

Assuming rates stay at 0.5pc, ITEM expects the economy to grow roughly in line with OBR forecasts at 2.2pc next year and just below 3pc for the following three.

Pressure for an early rate rise mounted last week after ONS data showed the economy grew at 1.1% in the three months to June, almost double forecasts.

However, Mr Spencer said: “The GDP figures don’t change the general picture of a patchy, sporadic recovery, which picks up very gradually.”

Low interest rates will be hard to sustain, he warned, as inflation will remain above target until the end of 2011.

“It is actually a very tricky situation for the Bank because VAT increases will keep inflation well above target until the end of next year, with all sorts of people saying that rates should be raised,” he said.

Despite low interest rates, ITEM does not expect house prices to continue rising.

“With unemployment high and confidence fragile, particularly in light of the impending tax increases and public spending cuts, the mini-housing market recovery of the past year looks increasingly unsustainable,” the report said.

Four in ten people who are planning to move home believe that buying now makes financial sense as they are confident house prices will rise over the next year.

Altogether, three-quarters of home movers believe that prices will either stay the same or go up.

Rightmove reported this morning from a survey of 20,000 prospective home movers.

But while confidence remains bullish, it has fallen: the 75% who believe prices will stay the same or rise compares with the 84% of price optimists recorded in April.

Miles Shipside, Rightmove commercial director, said: “A 9% drop is a significant shift. However, three-quarters of people still believe that prices will either be the same or higher in 12 months’ time. This suggests that either the government cuts have not yet bitten hard enough to knock the inherent belief in property as a long-term safe bet, or there is a strong sense that the property market’s dark days are behind us.”

He added: “With austerity measures starting to bite, a growing nervousness is to be expected.”

Rightmove itself has just recorded a drop in asking prices and is predicting that further falls in the second half of this year will wipe out gains in the first half.

Proposals for responsible lending could lead to families being prisoners to their homes or mortgages, while a ban on self-cert products could bar self-employed people and others from home ownership.

Adam Challis, head of research at Hamptons International, said: “Self-certification mortgages are an important tool for the self-employed, or for salespeople who rely heavily on bonuses to make up their income.” He called for greater flexibility.

Other warnings have come from Moneyfacts and the Association of Mortgage Intermediaries after the FSA published its proposals.

These include the ban on self-cert mortgages, a likely ban on fast-track products, and a requirement for lenders to verify the income of all borrowers.

The AMI said it was concerned that existing and future mortgage borrowers could be unnecessarily excluded from access to finance and face much higher costs.

Robert Sinclair, director of AMI, said: “The costs to firms will be significant and these will have to be passed on to consumers. There is some evidence that the self-certification process was misused. However, its demise will make life more difficult and expensive for consumers.

“Of greater concern is that despite the lack of any compelling evidence, it appears fast-track mortgages may also be consigned to history. Consumers using the fast-track process were those with good credit history who were deemed low risk by lenders. We will continue to support our lender colleagues to retain this important feature of our mortgage market.”



At Moneysupermarket, Hannah-Mercedes Skenfield said: “We have already seen a huge reduction in self-cert mortgages, so this announcement should not come as a shock to those who have previously relied on these. For people who are self-employed, a self-cert mortgage has long been the only way to obtain credit to buy a home.

“The danger of self-cert mortgages has meant that often people were able to borrow money they had little chance of ever being able to pay back and lenders were too lax in checking the security of their income.

“By the very nature of their income, people requiring self-cert mortgages are a riskier bet, and have been known to default more frequently. It is therefore understandable that the FSA should look to safeguard this section of the market and put responsibility on the banks’ shoulders to check the security of their borrowers.

“However, in practice the verification of income could be a tricky process, with future income levels often very hard to predict. The FSA should be careful not to exclude a number of people from the market who can clearly afford to repay a mortgage but cannot verify their income by 100%.”


She went on: “We have said for a long time that lenders should focus more on affordability and loan to income ratios rather than loan to value ratios, as high LTVs do little to encourage those with a solid income but no deposit.

“It is our belief that the continued focus on ‘equity as king’ provides an unnecessary barrier to a large number of first-time buyers looking to get on the mortgage ladder, and is preventing the mortgage market’s return to a healthy level.”

With the housing market still in a state of flux and predictions that house prices may fall further, many homeowners who are looking to move may consider renting their property out instead of selling.

However, moneysupermarket.com has warned homeowners who are considering this option to make sure they take out adequate landlords insurance as standard home insurance policies become invalid once you earn an income from your property.

With tenant demand for residential property continuing to rise, the proportion of landlords planning to buy new properties increasing and lenders slowly reintroducing good value buy-to-let mortgages, the number of people becoming landlords for the first time appears to be on the rise. 

Whether you are moving into buy-to-let for investment, or have decided to go down this route to move home, getting the contract and paperwork right is essential and having adequate insurance in place is a must.

Last year, one in three landlords had tenants in arrears, so Brits shouldn’t skimp on their insurance. However it doesn’t have to break the bank, with standard landlord insurance available from as little as £93 a year from simple insurance, which covers loss of rent. For £134 a year, acumus will provide landlords with cover for legal expenses should they arise from incidents such as repossession, tenant default, and debt recovery.

Julie Owens, head of home insurance at moneysupermarket.com, said:

“Whether you’re looking at buy-to-let property for investment, extra income, or because you cannot sell your house, it is essential to have sufficient insurance to cover any financial losses connected with letting out a property. I advise anyone contemplating becoming a landlord to seek advice and get all of the relevant information before taking this venture on.”

“Landlord insurance which includes Rent Guarantee cover or legal expenses can be more expensive, however if things go wrong between a landlord and tenant legal proceedings can involve a hefty cost. It is important to have a good contract in place to know where each party stands should the tenant and landlord relationship fall sour.

“I advise insuring yourself against these circumstances before they arise, it is always better to be prepared and there are a number of suitable insurance policies for landlords on the market. The varying levels of cover available means it’s essential to do your research and pick the policy that is the best fit for your circumstances, policy wording can differ so it is vital to check the small print to determine exactly what is covered.”

Some 72 per cent of all mortgage applications in June were for fixed-rates, according to data from Countrywide’s monthly mortgage report.

Homemovers are favouring fixed-rates over trackers in anticipation of a rise in the Bank of England’s (BoE) interest rate.

This amount of fixed-rate mortgage applications has not been seen since October 2009, according to Countrywide.

The split between fixed and tracker applications jumped 19 per cent since January 2010, with a seven per cent increase in fixed-rates from May to June.

Countrywide suggested that homemovers are preparing to accept the higher interest rates that typically come with fixed-rate mortgages.

The average interest rate of Countrywide’s top 10 mortgages in the first six months of 2010 was 4.62 per cent, a 0.67 per cent decrease from the same period in 2009.

Some 78 per cent of remortgage customers are also opting for fixed-rates, a four per cent increase on the previous month.

Grenville Turner, group chief executive of Countrywide, said that the mortgage market is still in an extremely fragile state despite the BoE holding base rate at 0.5 per cent.

He said: “The recent Bank of England Credit Conditions report revealed that lenders are becoming nervous about the cost of wholesale lending – if this transpires into the mortgage market through tightened lending criteria, we will see a significant impact that could damage any chance of a recovery in the property and mortgage markets.”

Borrowers moving home in May saw their mortgage interest payments accounting for the lowest proportion of their income in 35 years, according to new data from the Council of Mortgage Lenders.

But David Brown, commercial director of LSL, said this should be put firmly in context and was not necessarily good news.

He said: “Borrowers may be paying less of their income to service their mortgages, but that doesn’t mean borrowing is becoming cheaper for everyone. 

“In large part it simply reflects the fact that lenders will only offer low LTV ratios, meaning those borrowers who have less equity (and would therefore need bigger mortgages, and spend more of their income servicing them) are frozen out of the market.

“Of course, this particularly affects first-time buyers, who are having to rely on rental accommodation while they save their deposits. But rents are rising fast now as rental supply diminishes. Landlords are also struggling with the constrained lending market to expand their portfolios. Unless mortgage finance loosens up for all borrowers, there is no end in sight for Britain’s housing shortage.”

Eric Stoclet, managing director of Crown Mortgage Management, said: “The availability of mortgage finance remains at dramatically reduced levels, and activity in the property market is subdued as a result. Lenders are under extreme pressure to increase the mortgage funding on offer. However, the banks now face a hugely difficult balancing act in trying to meet the conflicting demands placed on them. In addition to offering more home loans to borrowers, the banks must refinance the money borrowed from special liquidity measures and wean themselves off government support at the same time.
 
“Punitive measures against the banks may be the populist decision in the current climate. However, the Government needs to realise that squeezing the banks further will have a harmful impact on the ability to lend to the right borrowers – and in turn damage the recovery in the property market.

“The Government must offer more support to lenders and ensure the conditions are right for them to maximise lending. Extending the special liquidity scheme, which is being gradually withdrawn, is one such measure. The banking sector cannot stay on life support forever, but turning it off now may kill the patient and damage the wider economy too.”
 
According to the CML, house purchase lending rose – albeit very modestly – in May for the 11th consecutive month. But with the challenging economic backdrop, public spending cuts and forthcoming tax increases, the CMLwarns that the positive trend is likely to tail off in the second half of this year.

Michael Coogan, director general, said the CML might have to revise its lending forecasts downwards. He said it “may now be looking a little optimistic”.

House purchase lending rose just 2% in May from the month before, to 42,000. There were 14,800 loans (worth £1.8bn) advanced to first-time buyers in May, up from 14,500 (worth £1.7bn) in April and 13,700 (worth £1.5bn) in April 2009.
 
Their characteristics have changed little in recent months. In May they borrowed an average of 3.14 times their income and 75% of the value of their property, but interest payments accounted for only 13.2% of their income, the lowest proportion since the 13% of March 2004.

The market could be hit badly if lenders are no longer able to undertake fast-track mortgage processing. Alongside a ban on self-cert mortgages, this is one of several proposals by the FSA on responsible lending that look set to go ahead.

The Council of Mortgage Lenders, however, has raised serious concerns. It said the mortgage industry recognises the inevitability of regulatory change – but claims there may be unwelcome side effects for consumers.

Fast-track loans, according to both the FSA and CML, have actually resulted in  lower levels of default than income-verified loans in the prime market.

If they are no longer allowed, the CML says it will inevitably mean higher administrative costs in processing loan applications.

The FSA also plans to require mortgage affordability to be assessed on a capital repayment basis, even where the mortgage is interest-only. However, warns the CML, the position of borrowers who wish to transfer to interest-only to manage periods of financial difficulty needs careful consideration.

The FSA also proposes a prescriptive approach to assessing the applicant’s available income to support the mortgage application, after taking account of other expenditure.

But the CML says this may simply make it more difficult for households to get a mortgage.