There are at last the positive, if tentative, signs of a recovering mortgage market. Mortgage lending in the UK rose in August by £1bn and mortgage approvals by the major banks increased 81% compared to the year before – when confidence in the financial markets was a severe low.
Despite these strong indicators, it is not all good news. The most strongly capitalised banks – particularly HSBC – are increasing their lending provision. But it is more difficult for some building societies that are limiting lending because of difficulty in attracting savings and the need to meet tougher rules on retained reserves. This helps explain why lending by UK building societies fell last month.
There was also bad news for remortgaging, which was again down last month. Lenders have been reluctant to approve loans for remortgages when current property values are in many cases little more than the outstanding loan balance – or when owners may even be in negative equity.
Property agents and others within the industry argue there can be no genuine market recovery until lending rates increase. Although prices have now stabilised, sales remain far below normal levels. It is only when sales, and lending, recover that it will be clear what will happen over the medium term to house prices.
“Demand is strong, but there are plenty of people who remain frozen out by the banks,” says Michael O’Flynn, director of the property website FindaProperty.com. “We’ve seen record numbers of visitors to our site over the last couple of months, yet we know that tight lending restrictions will prevent many responsible borrowers from gaining finance. Before we see any change of pace in recovery, lenders must become more reasonable in their lending criteria.”
Despite these criticisms, the overall picture is that the financial markets are steadily recovering and this is feeding through into greater availability of mortgages, with more competitive rates and charges now becoming available.
The most headline grabbing announcement by mortgage lenders has just come from HSBC. On top of recently launching a 1.99% discount mortgage, the bank is also putting an additional £500m into lending for first time buyers. Mortgages geared towards first time buyers start at 3.89% for a two year discount mortgage.
An improvement to the availability of first time buyer borrowing is desperately needed, both for the borrowers and for the housing market generally. With borrowers having to find much higher levels of deposits than in the past, lending to first time buyers has shrunk dramatically.
Analysis conducted by Moneynet is instructive. Two years ago a typical UK property cost £130,000, but is now £104,000. Yet the minimum deposit required has jumped from £6,500 to £10,400, the best fixed rate mortgage is actually 0.2% more expensive (despite the cuts in base rate) and the arrangement fee for the best buy mortgage has risen by £200. Although there is a stamp duty holiday (which finishes at the end of the year), the initial outlay for a first time buyer has risen from £7,800 to £10,400.
So it is welcome that lenders are addressing the difficulties in this market. Ulster Bank has improved products aimed at the first time buyer market several times in the last year and also supports a dedicated website, www.firsttimebuyerni.com.
Ulster is now offering a range of other product improvements, reflecting the fact that, says Mike Bamber – its chief executive of retail markets – “we welcome more demand”. Discounted interest rates are being cut, there is an improved offer for remortgage customers and an increase in the loan to value (LTV) for remortgages to 90%. Ulster’s two year discount mortgage is now down to 2.99%, for borrowers able to provide deposits of 25% of purchase price.
Variable, not fixed
And, according to leading mortgage broker John Charcol, discounted variable rates are at present the most popular type of mortgage being sold. Borrowers expect the base rate to remain low over a sustained period, making variable rate products more attractive. But lenders’ margins on new fixed rate mortgages have increased, making them less appealing.
Less than half of borrowers are now opting for fixed rate mortgages, says John Charcol. And discounted standard variable rate mortgages have advantages over trackers, argues the firm.
“Nearly 10% of our clients choosing a variable rate went for a discount off SVR rather than a tracker, reflecting in part some very cheap discounts, but also our revised view on the relative merits between tracker and discount rates,” says Ray Boulger of John Charcol. While headline rates of SVRs are mostly between 4% and 6%, Boulger expects these to fall closer to base rates – reducing the risk for borrowers of being stuck with high SVRs once the discount period ends.