Bank of England governor Mark Carney recently revealed his “macroprudential tools” which are aimed at slamming the brakes on the UK’s red hot property market. However, the inevitable question that arises is what effect will the “tools” bring along?
The Bank of England is in the process of implementing two new rules. The first rule will limit the number of mortgages which lending institutions can hand out on a loan to income ratio basis above 4.5 to 15%. The second rule introduces a fresh affordability criteria which will only provide borrowers with a mortgage if they will be able to afford to repay the loan at a 3% higher interest rate than it is today.
The new rules are not seen as a clampdown on lending by industry experts. There is an anticipated reaction that the general consensus regarding the rules is that they are not sufficient to deal with the issue. In the Bank of England’s analysis is a projection of its own which predicts that if worse comes to worse the amount of lending will be reduced by 2.5%. A spokesperson for the Bank said that “If house prices and mortgage approvals grow in line with the central scenario, the impact of the policy action is likely to be minimal”.
The impact of the measure taken, whatever it is, will most certainly be felt in London as well as some parts of the south-east. Generally, throughout the country, 9% of new loans issued are done so at 4.5 or more times income in comparison with 19% in London. However, in these parts of the country lenders who do such loans are likely to be most affected by the 15% limit.
The affordability test has already been implemented with a majority of lenders who now have to check whether the borrower can afford repayment of the loan at a 3% higher than now level. However, some lenders have taken measures of their own to assure they are giving good loans by applying an interest rate closer to 7.5%. It is expected that the introduction of these measures are to curb amongst the worst of excess in the market.
Will the price of houses fall?
If this attempt by the Bank of England is disguised as a means to throw a spanner into the works then it is a bad attempt as it appears no body is fooled. This is evidenced immediately by looking at the market and the price of some of the stocks. Shares in Barratt and Persimmon, the house building companies, were among some of the fastest risers this week. This is clear evidence that the tough talk from Governor Mark Carney is simply hot air.
There is bad news for people looking for a new mortgage. The rates charged on two-year fixed-rate deals rise at their fastest pace in over two years.
In other words, this means that a person who is applying for a two-year fix on April 1 would have normally been offered a rate of 3.52%. However, by April 30 this rate would have jumped to 3.61% on average. This difference would accumulate to nearly £300 extra that would have to be paid over the term of a mortgage for £250,000. Such a sharp rise of 0.09% on two-year fixed across all loans-to-value has not been seen since February 2012.
The Mortgage Market Review in March 2014 has brought changes in mortgage rates and lenders will need time to adjust. The reasons for these changes is that the swap markets which lenders use to price their loans have experienced volatility in recent weeks during the continued speculation about when the Bank of England might increase the base rate from its significant 0.5% low as the economy improves.
Furthermore, some lenders have recently increased the rates they are offering under the Government’s Help to Buy mortgage guarantee scheme which proposes state-backed home loans to help people with deposits as low as 5% to move on or up the housing ladder.
Recently, Santander increased a two-year fixed deal under the Help to Buy by 0.1% to 5.09%, although the benefits that come with the package remain. These benefits include things like no set up fee, a free valuation and £250 cashback on completion. Another bank that has increased the rate of a two-year fix under Help to Buy is NatWest. Its increase is from 0.4% to 5.39%. Its deal is also fee-free.
The Bank of England suggested that additional steps could be considered in order for the property market to be cooled. Reports have recently pointed to strong house price gain as more potential home buyers flow into the market during the increasing consumer confidence in the economy.
The Bank also pointed out that it will not be a good idea to ignore the housing market momentum.
One scheme called Funding for Lending which helped to extend mortgage availability last year by offering banks access to cheap funding, has been re-directed to helping businesses in 2014.
Under the new rules, lenders would have to do more enquiring to mortgage applicants about their spending habits. Furthermore, applicants will have to go through the so called stress tests in order to assure lenders that they can cope with interest rates rising.
According to the statistics provided by the Bank of England the number of people who arrange mortgages in the UK has fallen for the first time in a year. A quick example shows that in January 2014 there 76,753 loans approved which is in sharp contrast with February when 70,309 mortgages were approved. Economists have not predicted this because since February 2013 the numbers of mortgage approvals have only been rising.
Nevertheless, Bank of England provided an explanation that the fall in February does not signify a slowdown but rather is due to the fact that in January the numbers were unpredictably high.
Bad weather in February was one of the reasons why analysts expected a tiny fall in mortgage approvals in this month. Nevertheless, the fall of more than 6, 000 approvals was not foreseen.
However, if we compare the figures from those from over a year ago, we will see that the number of mortgage approvals in February was still up by 33%. Even those figures cannot weaken the view that the housing market is going through strong impetus.
Furthermore, according to the Bank of England, the number of business loans given out continue to decrease. For example, British businesses have borrowed £447.5bn in February 2014, which is down £0.8bn on January 2014, and overall this marks a fall of 3.7% over the last 12 months.
Therefore, since the start of the year, the Government has focused its efforts to encourage lending to businesses through schemes such as the Funding for Lending Scheme. Through this scheme lenders can borrow money at cheap rates, as long as the money are passed to companies or small businesses.
Since Leeds Building Society launched a new remarkable 10-year fixed rate mortgage, it is worth examining the positive and negative aspects of it. Bank of England suggested that UK borrowers should follow the example of borrowers from other countries where they can fix their mortgages for up to 40 years. The Bank’s Financial Policy Committee emphasized on the advantages of fixed mortgages, especially those fixed for longer, for the housing market in the UK because there will be a lower risk associated with it.
However, until now long-term fixed mortgages have not enjoyed a big popularity in the UK, even though there are very common choice in countries such as the US, Denmark and France.
Nowadays, the question of long-term mortgage deals is again on the table. Currently, the longest fixed deals that can be found in the UK are for ten years and there is very few of them. In comparison, there are hundreds of five-year fixes and thousands of two-year fixes that are offered today.
Leeds Building Society is the latest lender to offer a ten-year fixed rate which available on a 65% loan-to-value with a rate of 4.49% and a £199 fee. This new offer combines two other deals, each being decade-long.
Now we will examine a few reasons why a ten-year fix might be a good choice. First of all, you will feel secure in the long-term in way that cannot be provided by a variable rate or shorter fix. Since you will be aware of the amount you have to pay each month and that it will stay stable will help you budget your income and make a better financial plan for your expenses. Furthermore, with a ten-year deal you won’t have to remortgage and waste more money on that. This will save you money from the fees associated with this procedure. Also, you will be able to lock into the record low mortgage rates available now. Since it is likely that base rates might increase in the future, locking in might be a good idea.
However, you should also be aware of some of the disadvantages of long-term fixed mortgages. One is that there are strict early repayment charges and the other is the price at which these deals come. Due to the long-term security that they offer , they are more expensive compared to other mortgages. Thus, before jumping into a fixed mortgage, explore carefully all the details about it.
A significant percentage of affluent borrowers are buying homes which causes a lot of major banks to stay in the jumbo mortgage business. Those high-balance loans are more risky particularly for interest-only jumbos and jumbos with debt-to-income ratios above 43%. Jumbo mortgage loans hold a higher risk for lenders, mainly due to their larger size and not so much because of the quality of the loan itself. This is because if a jumbo mortgage loan defaults, it may be harder to sell a luxury residence quickly for full price. Market has a serious influence on luxury prices in most cases. Therefore, lenders sometimes prefer to have a higher down payment from jumbo loan seekers. It is more difficult to sell jumbo home to the average borrower because prices can be more subjective. Thus, many lenders may require two appraisals on a jumbo mortgage loan.
However, homebuilders are finding plenty of lenders that will serve their customers.
Most of jumbo mortgage are being done by lending through its private wealth management unit and some through its others bank branches.
Jumbo loans have played an important role in the so called US housing bubble. The rising of house prices in the United States have caused a rise in the jumbo loans applications. Jumbo mortgages were not limited only to luxury properties anymore. Rather many average clients who were interested in buying a normal house in big-city areas, were applying for a jumbo loan.
The conditions for such loans were 40 to 50 years amortization or an interest-only option. This meant the loan could be paid over a longer period of time. The other option was that paymnets could be differed of principal for a few years. Even though that, lenders started to refuse giving jumbo mortgages since 2007 when prices fell down. Other lenders who chose to stay in the jumbo loans sector, rose their price rates. This created a vicious cycle where there was a lack of lending and thus, expensive residences couldn’t be bought and in turn, this put a pressure on house prices. Later on, new limits to jumbo mortgages were adopted in order to fit into the new economic environment after the financial crisis in 2008.
Interest only mortgages appear to be a topic which is slowly but surely becoming extinct. There are currently only several lenders on the market which are willing to provide these loans which have strict conditions attached to them. The month of March saw the latest withdrawal from the Yorkshire Building Society which pulled the plug on its interest only mortgages. This was an action taken as a result of the general slump in the market of these types of mortgages. Other big lenders who have taken measures to withdraw the interest only mortgage from the market include RBS, NatWest, the Co-Operative as well as Nationwide.
Other lenders such as HSBC who are continuing to provide the loan on such basis do so to a very small and select number of customers, in the case of HSBC to its Premier banking customer base. Furthermore, Virgin Money has taken a different approach in tightening up its lending standards by announcing that as of 9th December it will only offer the service to wealthy individuals who are earning in excess of £100,000. The bank has further stated that it will not loan to first time buyers and introduced a new minimum loan size of £500,000 which replaces the previous £300,000.
The criteria for the rest of the banking sector is now that most lenders require a deposit of 40% of the value of the property with many reluctant to offer the interest-only mortgage to first time buyers, making it even more costly for them to get on to the property ladder. What this means is that a person looking for an interest only mortgage on a property worth £200,000 will need to deposit £80,000. If by now you think this criteria is hard enough to meet and will only be sufficed by high net worth individuals it doesn’t end there. A person seeking an interest only mortgage will have to provide evidence that they are able to repay the loan with the typical method of doing so being; a lump sum from a personal account, a pension plan or the sale of a property or a second home. The method of proving repayment needs also to have been in place for a minimum of six months.
Interest-only mortgages have been targeted by lenders as something to get rid of and limit to a very small proportion of borrowers. These schemes were initially created so that borrowers pay off the value of the property at the end of the mortgage agreement in full, with the monthly payment only covering the interest rate. They are therefore considerably cheaper than standard mortgages.
The Bank of England has warned that the rapid rise in housing prices could destabilise the Country’s recovery and has therefore taken measure by withdrawing its funding package for mortgage lending. The bank’s Governor, Mark Carney, stated that the Funding for Lending Scheme (FLS) which enables banks and other lenders to borrow money at a cheap rate in return for providing more mortgage loans is set to be scrapped to household related lending as of February 2014.
The action has come amid a fast rise in house prices, the fastest on record until prior the financial collapse, which has now caused many to fear another major housing bubble. The fears have been further fuelled by low interest rate level lending and the Help to Buy scheme launched by the government. Shares in some of the country’s largest house building companies dropped as the markets feared that mortgage lending would be scaled down. The result of this saw a loss of between 2.2% and 6% of the value of the UK’s three biggest housebuilders which totals to a staggering £470m combined loss of value.
The Governor of the Bank of England stated that the Help to Buy scheme was not a factor in the decision to make the policy changes and that the decision had been made by the Bank as well as the Treasury department. The scheme was set up with the aim to encourage and aide new buyers into the property market by helping them obtain mortgages with very little up front deposit. The Chancellor, George Osborne, stated that now the scheme has achieved its objective which was to kick-start the housing market, its focus should now target small-business and aid the recovery of those most in need.
Removing lending from households from the scheme is to date the clearest indication by Mark Carney that the rising house prices risk derailing the entire financial system as it did during the 2008 financial crisis. The Governor in previous statements has said that price rises in housing is mainly happening in the south-east region of the country and that mortgage lending is at an all-time low. However, in his latest statement he shared the Bank’s concern about the rapid evolution which has occurred in the housing market. This concern has come following figures which reveal that mortgage approvals are at a five year high which us a statistic compiled by the Bank itself.
The Bank of England has reported that both the supply and demand for mortgages increased between the months July and September. The Bank of England’s Credit Conditions Survey revealed that banks increased the supply of mortgage lending to households in the third quarter of 2013, but do not expect the rapid growth to continue at the same pace in the coming months.
There was a significant rise in the number of mortgages accessible to borrowers with loan-to-value (LTV) ratios above 75%, despite the fact that lenders’ willingness to lend at LTV ratios above 90% changed little. The expansion in mortgage supply over 75% LTV was attributed to lenders craving to increase their stake in the home-loan market, rather than any increase in an appetite for more hazardous lending. Accordingly, there has been no significant change in the credit scoring criteria, maximum LTV ratios and maximum loan to income ratios for mortgage lending between Q2 and Q3.
The ‘spread’ or ‘margin’ over Bank Base Rate or swap rates which financial institutions associate with mortgages fell overall in Q3 and is expected to fall further in Q4. Demand for mortgages for purchasing homes rose significantly in Q3 and was expected to develop further in Q4, and banks likewise reported a big rise in demand for remortgage deals. Mortgage defaults also fell significantly in Q3 and are expected to fall even further in Q4.
Reporters caught up with Mark Harris, chief executive of mortgage broker SPF Private Clients, who told them:
“Lenders report that demand for mortgages increased significantly in the third quarter, a trend expected to continue for the rest of the year. Cheaper mortgage rates are the main driver of this demand, with Funding for Lending in particular pushing down rates to record lows. For many would-be borrowers, this is finally an opportunity which is just too good to miss.
“Consumer confidence and rising house prices are also playing their part. Borrowers feel more confident about job prospects and the wider economy, while fear getting priced out of the property market further still if they don’t take the plunge now. However, caution should still prevail: mortgages should only be taken on if borrowers can afford them and it’s important to take a longer-term fix if you are at all concerned about interest rate rises in the future.
“There has been a significant increase in availability of loans for those borrowing more than 75% loan-to-value but not much change in the 90%-plus bracket. The reason for this could be that lenders are waiting for the mortgage guarantee element of Help to Buy, which will enable them to lend at higher LTVs. It does underline that there is a real need for 95 per cent mortgages for those who can afford the mortgage payments but only have a modest deposit.”
For those living in London, getting on the housing ladder can be tough. What with rising house prices and living in the UKs most expensive city, it is becoming even more difficult to find a property, whether you are a first time buyer, or looking to relocate. What if there was a tool to make this easier – something that would show exactly which borough will give you more bang for your buck?
Step forward the new London Borough Comparison tool from NatWest [pictured above]. With this nifty tool, not only can you compare property prices across Greater London, but also delve deeper into the essentials that everybody looks for in an area. From latest crime rate figures to the boroughs with the lowest council tax, the high street bank has made all the most important information available in just one click.
The easily embeddable tool is the first interactive image of its type to be produced by NatWest and not only allows you to view specific information on each borough [see below] but also has a built-in TfL map so that one can offset house costs against travel costs.
To try the free tool out for yourself, simply visit this link: http://www.natwest.com/personal/mortgages/area-comparison/london.ashx
Prominent economists have warned us this week that is Britain is flirting once again with a potentially excessive rise in house prices. A Reuters poll put the chances at 50-50 or higher over the next half-decade. Eleven of the 29 economists surveyed during the poll expressed that they thought the possibility of a house price bubble was ‘likely’.
The chief executive of mortgage broker SPF Private Clients, Mark Harris, explains to reporters his concerns about the risks of a bubble: “With returns on cash hopeless, buy-to-let investors returning to the market in droves and the introduction of government schemes to help homebuyers, we have all the makings of a housing bubble so it is important to moderate and not get too carried away.” Mark Carney, the new Bank of England Governor last week signalled that rates may not rise for three years, it’s no wonder more people are thinking about joining the property ladder or taking advantage of the attractive low rates to move home. The Bank of England’s base rate has never been lower than it is now.
On the other hand, competition between mortgage lenders has been getting fiercer, leaving average five-year fixed rates standing at 3.83 per cent, the lowest they’ve been for a long while. In addition, the Royal Institution of Chartered Surveyors published the latest estate agents’ survey this week, showing that home prices grew last month at their fastest rate since the market peak of November 2006. This news has raised fears among potential homeowners that if they don’t take advantage soon, the affordability of their desired home may climb beyond reach.
But potential homebuyers must be wary of rushing to buy a house, as this could prove a foolish and expensive mistake. It’s wise to look for a home that you may be happy with for some years, rather than a property that you hope you may be able to sell at a profit in a year or two. If a bubble does occur and prices deflate, you’re more likely to end up in negative equity and stuck with a property from which you can’t escape. Negative equity occurs when you owe more than you borrowed.
There are other alternative ways for the cash-strapped to buy a home, not least through the Government’s flagship Help to Buy scheme. Parents can also provide a similar facility to their children as some lenders do accept them as guarantors for a mortgage. Furthermore, you can even buy with friends, each friend owning a share of the home.