Mortgage Outlook
There seems previous little good news in the mortgage market these days. House prices are falling, which will reduce equity in people's homes, mortgages are getting more expensive, and they're harder to come by.
Moneysupermarket.com says that fixed-rate mortgages have stayed around 7.3%, despite the Bank of England base rate cut in early December. Some banks have even been pushing up their variable tracker rates.
Moneyfacts.co.uk says that some banks have cut the loan-to-value percentages on loans, reduced to 90% - or as low as 75% in some cases - meaning a higher deposit would be required.
Banks have been increasing their margins over the past six months or so, pushing up their interest rates in comparison to the base rate, or by increasing arrangement fees. In November 2006 the average arrangement fee was £634, but it is now £827.
Lenders will win either way: either the interest rate is low, but the arrangement fee is high or the arrangement fee is low, but the interest rate is high.
Whichever it is, the price of mortgages has gone up, and continues to do so. The credit crunch is to blame for much of the current woes. Northern Rock, of course, is paying the ultimate price. For others, the customer is going to pay the price.
Usually the rate at which banks lend to each other - the Libor - is very close to the base rate, but in recent months this has not been the case. Libor has gone up as a result of the credit crunch and banks' unwillingness to lend to each other. The Bank of England injected some cash into the system in December, helping Libor to come down.
Banks are not only less willing to lend to each other, but they're being much more careful about which customers they lend to. A year ago, you couldn't move for banks, building societies and other lenders trying to lend you money. Sub-prime borrowers could get a mortgage with an interest rate of around 7%.
Things had gone too far, but now the correction point has arrived, and the range of mortgages on offer has slumped dramatically. Sub-prime borrowers now have 63% less mortgages to choose from than they did in July last year, which means that what they've got to choose from will be much more expensive.
Mortgages are also rising because banks can afford to increase their margins when there is less competition. Imagine the shrug, and implied, "go elsewhere if you think you can get a better deal." Customers simply have less to choose from.
However, there does seem to be a split between prime and sub-prime mortgages. For prime mortgages there is still keen competition, as banks want less risky customers on their books. For prime mortgages there are cheaper fixed rates coming. But for sub-prime mortgages the outlook is bleak.
Louise Cummins, head of mortgages at Moneysupermarket.com, says: "The pricing is much more aggressive compared with a year ago or even a month ago."
For prime mortgages the shake-out might be complete half-way through the year, but for sub-prime mortgages, expect misery for a while longer than that.
Published on January 21, 2008
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