There are roughly 26 million homes in the UK, of which about two-thirds (67%) are owner-occupied. Of these 17.5 million owner-occupied homes, around 11.3 million have mortgages secured on them. Total UK mortgage debt comes to £1,252 billion, which averages £111,000 per mortgaged home.
With numbers this big, it’s not surprising that we Brits are fixated with house prices and mortgage rates. To find out more, let’s take a look at recent trends in the housing and mortgage markets:
1. House prices creep up
Let’s begin with that most British of obsessions: house prices.
According to the Halifax House Price Index, the average price of a UK home rose by 0.5% in May, following a 2.3% fall in April. While there has been a slight improvement in the trend for house prices, they remain slightly lower than a year ago.
What’s more, the Halifax expects prices to end 2012 at roughly where they are now. With the tough economic environment here and in the euro-zone keeping a lid on prices, we won’t see a booming housing market (outside of ‘fortress London’) for years to come.
2. Fixed rates could fall
With the Bank of England’s base rate held at 0.5% a year since March 2009, mortgages are incredibly cheap in historical terms. With a deposit of 25% to 40% of the purchase price, you can choose from fixed and variable rates below 3% a year.
After rising earlier this year, fixed rates could soon be coming down. The pricing of fixed rates depends on gilt yields (the income paid by UK government bonds) and the cost of interest-rate swaps. Recently, gilt yields have fallen to record lows, while swaps rates have also dipped.
In fact, the price of two-year swaps fell by 0.15% between 9 May and 6 June, according to mortgage broker John Charcol. Five-year swaps fell by 0.18% over the same period, while 10-year swaps slipped by 0.19%. Thus, these reduced funding costs could see lenders lower their fixed rates in the weeks ahead.
3. Low-deposit loans get cheaper
Mortgage rates are falling for first-time buyers and those with small deposits, thanks to an increase in the range of loans on offer.
In May 2011, the average rate charged by a 90% loan-to-value mortgage (one requiring a 10% deposit) was 5.98% a year – and there were 238 of these loans available. Today, this rate has dropped to just 5.44% a year – and there are 299 such mortgages on offer, according to Moneyfacts.
In short, these loans are getting cheaper, while competition for loans to first-time buyers is hotting up. This is great news for those looking to take their first steps onto the housing ladder.
4. Free insurance is dying out
At the peak of the housing boom, most lenders offered free valuations and free legal fees to home-buyers. Today, these and other ‘freebies’ – such as ASU (accident, sickness and unemployment) insurance – are gradually vanishing.
According to Moneyfacts, there were 178 two-year, fixed-rate mortgages on offer in June 2008. Of these, 53% offered free property valuations, 51% provided free legal costs and 19% gave free ASU cover. Today, there are 589 two-year, fixed-rate mortgages available, but only 47% offer free valuations, 44% provide free legal costs and hardly any give free ASU cover.
Of course, removing these hand-outs makes today’s mortgages a little less attractive than they were four years ago, especially to borrowers looking to remortgage.
5. Buy-to-let deals disappear, but rates tumble
Five years ago, before the credit crunch hit, there were 2,265 buy-to-let (BTL) mortgages available to British landlords. Today, this range has collapsed by more than four-fifths (82%) to a mere 411 BTL loans, according to Moneyfacts.
Despite this mass-withdrawal of BTL mortgages, interest rates have dropped since mid-2007. Back then, variable-rate BTL loans charged an average rate of 6.23% a year; now it’s 4.53%, down 1.7 percentage points. Also, the average fixed rate has come down a whole percentage point, from 6.03% in July 2007 to 5.03% today.
With rental demand strong and rents rising, these lower mortgage rates mean bigger profits for BTL landlords.
6. A new lender
US-owned Metro Bank entered the UK market in 2010, becoming the first high-street bank to get a licence for over 150 years. Based in London and the Home Counties, Metro Bank offers current and savings accounts, but is entering the mortgage market, too.
On Monday, 2 July, Metro Bank announced that it is to offer home loans via intermediaries (financial advisers) in partnership with leading mortgage broker John Charcol. Its pilot programme will provide mortgages of up to 80% loan-to-value for higher-priced homes in London and the South East.
It remains to be seen how well Metro Bank will compete against giant lenders such as Halifax, Lloyds, RBS and Santander. Nevertheless, any new competition is welcome, especially a bank committed to customer service, transparent pricing, a simple fee structure and the manual underwriting of every loan.
7. Mortgage debt dips
Finally, something very rare happened recently, because UK mortgage debt fell from April to May. In May, British mortgage borrowers repaid £73 million more than banks handed out in new home loans lending. This is the first time that repayments have exceeded the amount being lent since monthly records began in 1997.
Does this spell the end of the UK’s ever-growing mountain of personal debt? I very much doubt it, but keep reading TotallyMoney for the latest news…
