Mortgage News

The Council of Mortgage Lenders have put forward a scheme to help ease the shortage of mortgage funds for new homebuyers. The CML hope that the Bank of England will be willing to guarantee a market for new mortgages. It would encourage people to invest in these products creating more funds for mortgages.

With no sign of the credit crunch easing, some are concerned that activity in the housing market has slumped to alarmingly low levels. The Royal Institution of Chartered Surveyors have recently published a report stating falls in house prices and the lowest levels of housing activity since records began in 1978. The RICS also warn that house prices could undershoot as people overeact to negative news.

Analysis

The Bank of England’s previous £50bn scheme to secure mortgage lending hasn’t solved the problem in the mortgage industry. This new scheme might help because it will extend the scheme to first time buyers as well. It is worth trying to act, rather than hoping that the problems will end. With the paralysis in the housing market, there is a chance house prices could undershoot, especially given:

• Long term house price forecasts
• Buying better than renting

Original post by Tejvan R Pettinger

It is an unwelcome development that many struggling homeowners are increasingly turning to short term loans to meet their long term mortgage committments.

According to financial website, MoneySupermarket.com, 7 per cent of households – or 1.8 million families have taken out unsecured loans (personal loans, credit card loans) to help meet with their mortgage payments.

In the long term this offers a bad deal for consumers. Interest rates on loans are between 8-9% higher than a mortgage loan, typically 6%. Credit card interest rates are even higher with rates reaching 17-18%.

The increased demand for unsecured lending has occured because of rising energy prices and mortgage costs. The increased cost of living could lead to a year of declining living standards as household budgets are placed under increasing strain.

Taking out loans to pay your mortgage payments may provide a short term fix, but, they also build up longer term problems and could make it difficult to remortgage. They will also exacerbate any problems of negative equity.

Alternatives to Loans

• Struggling to Pay Mortgage?
• How To Avoid Defaulting on Mortgage Payments
• Extending Mortgage Term

Original post by Tejvan R Pettinger

A couple of years ago, an elderly friend of mine, berated me for having a few thousand pound debt on a credit card. (It was debt on a low % balance transfer) He said the modern generation were very bad because they were so keen to borrow money. To some extent he has a point about younger people being keen to take on debt. (There are currently record levels of personal debt in the UK and other countries.) However, I pointed out that he had been quite happy to take on a mortgage debt of £100,000. I asked him why his mortgage debt is fine, but, other types of debt are not? It was an interesting discussion. These are some of the issues about mortgage debt.

Low Interest Rates.

Mortgage debt is generally the cheapest way to borrow. Banks offer rates relatively close to base rates because it is seen as secured debt. Unsecured lending on credit cards and personal loans can cost upto 2 or 3 times the interest rate. However, in an era of falling house prices, there is a danger people could be left with a situation of negative equity; their secured borrowing becomes unsecured.

Spread out Over Many Years

A mortgage can be spread out over a time period of 20-50 years. This is both a benefit and a problem. The benefit is that it enables us to borrow large sums and keep the repayments manageable. The drawback is the longer we borrow for, the more we have to pay in interest rates. The total cost of mortgage payment can be 2-3 times greater than the initial loan. See: Should I pay off my mortgage early?

Mortgage is an Investment.

When we take out a personal loan to go on holiday, there is no investment. We get the money, spend it and then have to pay it back. With a mortgage we are saving on the alternative which is renting a house. Mortgage payments may seem like a big burden, but, so is the cost of renting. It is estimated by Abbey National that over a 25 year period, buying is £10,000 cheaper than renting. Even bigger benefits occur after this period ends. see: To buy or rent which is better?

Mortgage can be used to consolidate other loans.

One advantage of taking out a mortgage is that later we can use it to consolidate other loans such as credit card debts. This helps us to reduce our interest costs. However, this may not be possible if we experience falling house prices and negative equity. Also, we may take advantage of our mortgage to borrow too much, leaving us with more debt than we can deal with.

Original post by Tejvan R Pettinger

Interesting data from the Council of mortgage lenders shows how volatile the importance of mortgage payments as a % of income are. see: Mortgage Payments as % of Income

Currently first time buyers are spending just less than 20% of their income on mortgage payments. However, this isn’t significantly more than figures in the 1970s and 1980s.

For example:

• 1974 -  16.3 % of income
• 1985 - 19.2 %
• 1990 - 27%

This shows that by historical standards mortgage payments are not as unaffordable as often is suggested. It reinforces the idea that if only people could get mortgages, buying a house is still relatively attractive compared to renting.

People often focus on house price to incomes ratios. But, living standards depend primarily on what % of income goes on mortgage payments. And here the key factor is often base interest rates. For example, 1990 was a bad year for homeowners because interest rates were so high.

However, it is worth bearing in mind.

• Many First Time buyers with low incomes are excluded, because in the current climate they simply can’t get a deposit and sufficient mortgage. If low income first time buyers could get a mortgage, the % would rise.
• The % of income spent on mortgages has risen since 2003, when the ratio fell to only 11%
• The real problem for first time buyers at the moment is they simply can’t get any mortgage approved. If they could get a mortgage approved, their payments would often be affordable (and probably lower than renting). But, with the credit crunch they just can’t access a mortgage

Forecast for Mortgage Payments as a % of Income

Falling house prices, and marginally lower interest rates have already started to reduce the % spent on mortgage payment from 20.7% in Dec to 19.6% now

• Falling House prices will reduce the cost of mortgages over time, helping to reduce the %
• However, many mortgage costs are rising independently of base rates.
• Forecast for interest rates are mixed. Some see potential for higher rates.

Original post by Tejvan R Pettinger

It really is the best time to buy! - honest!

This sign caught my eye as I was cycling home. It was in the window of Connell’s estate agency Between Towns Road, Oxford.

Is this an example of irresponsible estate agents encouraging people to buy a house, when actually it makes a very bad decision? Or are there good reasons to buy now?

Why it is Not A Good Time To Buy

House Prices falling. Even the most optimistic forecasters expect moderate house price falls in the next 12 months. If there is a median prediction of house prices to fall by 12% in the next 12 months, why not wait until house prices have bottomed out? There seems no rush to get on the property ladder when you could wait and save potentially thousands.

Difficulty of Getting Mortgage in Present Climate.

Unless you have a deposit of 25%, you are likely to face higher borrowing costs from banks. If you wait, mortgage deals may become more competitive when the worst of the credit crunch is over.

Negative equity

Falling House prices could lead to negative equity. This is a real problem for people with less than 95% LTV

Why It Could be A Good Time To buy.

• If you are Downsizing it makes sense to sell your high valued house and buy a cheaper house.
• Despite banks increasing their profit margins, interest rates are still low by historical standards. With a downturn in the economy predicted, there is little prospect of a sharp rise in interest rates. Hopefully, when oil prices stop rising, there may even be room for rate cuts.
• If you are buying to live, who cares about falling prices? If you live in a house, it doesn’t really matter if house prices fall, it doesn’t affect your monthly income. It is only a problem if you decide to sell and move into rented accommodation.
• Buying is preferable to renting. There are several advantages of buying a house rather than renting; the sooner you buy, the sooner you will have paid off your mortgage and you can live rent free. Abbey say buying is still cheaper than renting
• Maybe House prices won’t fall that much, in the long term prices could rise. long term forecasts

Would I buy A House in Present Climate?

If I was a first time buyer, I would look on the property market, I would be in no rush to buy, but, if a great value house came along, I would put in a competitive offer, well below the asking price. I would consider buying, even in the knowledge prices could continue to fall. However, if my rented accommodation was quite comfortable, I would probably wait for 12 months in the expectations prices will have fallen; in 12 months I would reassess the property market and probably get something significantly cheaper.

Original post by Tejvan R Pettinger

1. Wait Before Buying

In the UK and US, the next 12 months are likely to see falling house prices. Therefore, this is a good time to wait and allow prices to drop before buying getting a mortgage. If you are wanting to buy now, use these predictions to offer significant discounts off the asking price. Homeowners who hold out for higher prices, will struggle to sell in the current climate

2. Save Deposit to get better rate.

Renting temporarily also gives you chance to save for a bigger deposit. A higher deposit will enable a better mortgage deal, especially in the current climate. If you can only put down 5%, you are likely to have less choice and face higher rates than if you can put down 10% or 15% deposit.

3. Make Extra Monthly Repayments.

Once you have a mortgage, one of the best things that you can do, is to try and make extra monthly payments. Therefore, if this is going to be possible take out a flexible mortgage which will not penalise over payments. Even making an extra £50 or $50 a month can make a huge saving to your final mortgage cost. Making extra payments will save interest payments and could shorten the length of your mortgage by several years. Paying extra into a mortgage is likely to beat most investment decisions you can make. Plus there is no risk and gaining a bigger % share in the house will make remortgaging easier. (Making extra mortgage Payments)

4. Remortgage regularly

It is oft repeated advice, but, remortgaging at every opportunity can save you alot of money. If you are reading this, chances are that you are aware of the benefits of remortgaging. But, many homeowners still fail to take advantage of the lower payments that can result from remortgaging. When your mortgage deal ends, make sure you have the best mortgage deal to take its place. Check online and with mortgage broker’s. The small investment of time will definitely pay  you back.

5. Buy Wisely

When buying a house, be judicious in buying a house that is not beyond your means. Evaluate different areas and avoid paying a premium for some areas which might be viewed as trendy or desirable for local schools (unless you need this). Getting the biggest house is not necessarily the best use of your money. Don’t tie up all your income into paying a mortgage. A smaller house may enable more disposable income to do other things like travel. Don’t spend the absolute most you can get away with; buy a house you will be happy with.

6. Small Lenders May offer best rates.

The best mortgage deals are often given by the smaller mortgage lenders and not the main high street banks. Therefore, don’t assume that the bigger lenders will be able to offer the best rates. - See (best mortgage deals - avoid big banks)

7. Current Account Mortgage

If you have substantial savings in a current account, you can put it to good use by taking out a current account mortage. This automatically uses savings in your current account to reduce your mortgage balance and make significant savings. You will also be able to save paying tax on interest from your current account. Definitely worth checking out for anyone with a current account. (Current account mortgage)

Original post by Tejvan R Pettinger

The rates on Fixed rate mortgages in the UK are continuing to increase. The average fixed rate deal is now 6.75% on 2 year mortgages. Fixed rate mortgages have now reached a 10 year high. Furthermore, continuing problems in the credit markets means that fixed rate mortgage rates are likely to rise even further. Mortgages, and especially fixed rate mortgages are determined by the interbank lending rates.

• These are sometimes known as ‘Swap Rates‘. The libor 3 month rate is also a leading indicator of interbank lending.

Because credit is in short supply with banks unwilling or unable to lend to each other, it is pushing up the cost of mortgages. Therefore, commercial banks are increasing their margin between the Bank of England base rate and their commercial rate.

For example, Nationwide, one of the biggest mortgage lenders has recently announced a 0.5% increase in interest rates, despite base rates remaining the same.

One of the lowest fixed rate mortgage rates is currently offered by Skipton Building society; its rate is still below 6% at 5.75%. However, with a set up fee of just under £1,000, the rate is effectively 6%. (link to Skipton Fixed rates)

Many other lenders are also increasing their charges to maintain profitability.

The rate on fixed rate mortgages is also complicated by recent suggestions that the Bank of England may actually be considering increasing interest rates to combat inflationary pressures.

The increase in fixed rate mortgages means many people having to remortgage in the coming months will see a sharp rise in mortgage repayments; it is this that could threaten future default rates.

Original post by Tejvan R Pettinger

A good credit rating is vital to being able to access loans and mortgages. The importance of a good credit rating is even more important now that the credit crunch has made lenders suspicious of people with bad credit histories. These are some tips on improving your Credit Rating

1. Check Your Credit Rating.

It is important to know your current credit rating and check to see it is accurate. You can have access to your credit rating through an agency like Equifax and Experian Under the consumer credit act of 1974, you have a right to see it at a cost of £2. This £2 figure is determined by the government, so if agencies start charging a lot more be very suspicious. If you see any discrepancies chase them up with the financial insitution involved.

2. Understand why you were turned down.

Although it is not compulsory, most firms will explain why they turned you down. This can be useful for understanding what you need to do. It can also help you avoid applying for the same products and getting rejected in the future.

3. Avoid Getting Repeatedly Rejected.

If you have a trail of turned down applications, other companies will start to be suspicious. If you get turned down, try to understand why, wait a while and then try again. Avoid applying on mass; make sure you do one at a time.

4. Good Budgeting.

The best way to avoid a bad credit rating. Is to spend time on organising your finances. Make sure you know how much you can borrow on your bank overdraft. Be prepared for occassions when you get close to the limit and take preemptive action. Most problems and bad credit ratings occur because of poor planning and lack of awareness of the financial situation. It is worth spending a little time to organise your finances and avoid unnecessary missed payments.

(more…)

Original post by Tejvan R Pettinger

In a decision by the high court yesterday, the decision to cap bank charges was upheld by the High Court. Seven Banks and one building society had taken the Office of Fair Trading to Court; they argued the OFT did not have the right to impose caps on bank charges. However, the High court found in favour of the OFT and this presents a big boon to consumers, who are will see lower bank charges. It also opens the gate for consumers to demand refunds for previous bank charges.

However, the big banks such as HSBOS may challenge the court ruling, they have until May 22nd to launch an appeal. Given the state of the financial markets, banks are likely to take any lifeline to defer the decision. However, the most likely occurence is that bank charges will become lower, Which magazine have called on banks to admit defeat and start paying back the estimated £1 billion. To benefit from this ruling, it is essential to contact your bank and ask for a refund for any bank charges.

How To Get A Refund for A Bank Charge.

If you have been charged excessively for things such as going overdrawn. Make a list of all the bank charges by looking at your statement.

In the first instance you should write to the bank, stating what you were charged. Then ask for a refund of the excessive amount. (more…)

Original post by Tejvan R Pettinger

Problems related to the credit crisis have led many banks and building societies to withdraw many mortgage products. Furthermore, the Council of Mortgage Lenders CML, say problems in the mortgage industry may get worse before they get better.  However, despite the difficulties of getting a mortgage, it still is possible for those who are dedicated to buying, especially if you have a big deposit.

Mortgage Products Withdrawn

• 125% Mortgages
• 100% Mortgages
• 95% Mortgages are becoming less common. For example, Britannia, and Alliance and Leicester have capped their mortgage loans at 90%. Other lenders such as Nationwide have said that loans of 95% of LTV will be significantly more expensive

Mortgages More Difficult to Get

• Interest only Mortgages
• Self Certification mortgages

Why is it More Difficult To Get A  Mortgage Now?

• Prospect of falling house prices. House prices are falling at their fastest monthly rate since 1978. This means many homeowners could be left with negative equity. This is one reason why lenders are preferring to see a big mortgage deposit.
• Shortage of Funds in the Money Markets. Since many American subprime mortgage lenders went bankrupt there has been a shortage of lending funds in many of the money markets therefore building societies are increasingly unable to lend.
• Higher Interest rates. The shortage of funds is pushing up in the interbank lending rates. Thus, lower Bank of England base rates are not being fed through into lower mortgage rates for consumers.
• Bank of England reluctant to cut base rates because of persistant cost push inflation.

How Can I maximise Chances of Getting a Mortgage?

• Save for a deposit. See: Saving for first mortgage deposit
• Be Patient. With house prices falling and prospects of lower interest rates, there may be no harm in waiting a few months before buying.
• Maintain good credit record.
• Save money in other areas

Original post by Tejvan R Pettinger