More than any other European nation, we Brits have a passion for property. This mania explains why the UK had the longest, strongest boom in house prices in modern history, lasting from 1995 to 2007.
However, after the credit crunch arrived in August 2007, mortgage lending and house prices both went into steep decline. Although house prices have exceeded their previous peaks in London, property markets in the rest of the UK are still largely subdued.
Weak demand for mortgages
The main reason for the weakness in the UK property market outside of London is that lenders are cherry-picking borrowers, giving loans only to those with spotless credit records and large deposits.
This has led to a slump in mortgage lending, with mortgage debt increasing by under £9 billion in the 12 months to February 2012. Before the boom ended, UK mortgage debt was soaring by as much as £117 billion a year, so lending has all but collapsed in this new age of austerity.
There’s a good deal out there
Despite lending being in the doldrums, great mortgage deals are still available, especially for borrowers with big deposits or plenty of equity in their current homes. Here’s what’s been happening in the mortgage market lately:
1. SVRs are rising
Almost all lenders have a standard variable rate (SVR), to which they link other variable-rate mortgages. The bad news is that SVRs have been rising relentlessly this year, led by Halifax, which raises its rate by 0.5% to 3.99% from 1 May.
Other lenders to follow in Halifax’s footsteps include Bank of Ireland, Clydesdale Bank, RBS/NatWest and Yorkshire Bank. Most recently, the Co-operative Bank hiked its SVR by 0.5% to 4.74%, also taking effect on 1 May.
In total, up to two million mortgage borrowers will be affected by these rate hikes, with some seeing their yearly interest bills rising by £1,000 or more.
2. New deals are getting more expensive
If you’re not happy with your current rate, then you should consider remortgaging – switching to a different loan or lender to grab a cheaper deal. However, the rates charged by new mortgages are also creeping up, which lenders blame on rising funding costs driven by fears of another euro-zone crisis.
According to financial analysts Moneyfacts, the average rate for a new fixed-rate mortgage is nearly 4.7% today, but was below 4.5% at the start of the year. What’s more, the average rate charged by variable-rate loans has climbed to around 3.9%, versus 3.65% three months ago.
These rises of 0.2% to 0.25% may not appear large, but they can increase the interest charged on a £200,000 interest-only mortgage by £500 a year.
3. Interest-only loans are vanishing
In their search for safety, mainstream lenders don’t want to grant too many interest-only mortgages. Instead, they prefer to lend on a repayment basis, because this guarantees that loans will be repaid in full by the end of their lives.
Recently, lenders have been pulling out of the market for interest-only mortgages, or seriously tightening their lending criteria for these loans.
The latest list of lenders reining in interest-only loans includes Cheshire BS, Clydesdale Bank, Coventry BS, Derbyshire BS, Dunfermline BS, Halifax, Leeds BS, Lloyds TSB, Nationwide BS, NatWest, RBS, Santander, Skipton BS and Yorkshire Bank. That’s a lot of nervous lenders!
Hence, getting an interest-only loan is likely to be harder now than at any point in the past 20 years. Instead, lenders will push you towards a repayment loan, which means paying higher monthly repayments.
4. Low rates require huge deposits
Lenders worry about rising unemployment, falling disposable incomes and further weakness in house prices. As a result, they prefer to lend to borrowers with big deposits. To access cheap rates, you’ll need a deposit (or equity in your current home) of at least a quarter (25%) of a property’s value.
Furthermore, the very best deals are reserved for those with huge deposits. For example, to grab HSBC’s lowest rates, you’ll need a deposit of at least two-fifths (40%) of a property’s valuation.
Therefore, if you are in the comfortable position of having a sizeable deposit, or lots of equity in your home, then now could be a great time to secure a low-rate, long-term bargain.
5. 95% mortgages still exist
If you’re a first-time buyer with a deposit below 25%, then you won’t be able to bag a bargain. Instead of borrowing at, say, below 3%, you may pay 5% or more. Even so, the number of deals for buyers with only a 5% deposit is rising.
Moneyfacts calculates that the number of 95% mortgages has shot up to 61 today, more than double the 27 low-deposit loans on offer a year ago. For borrowers with a 10% deposit, the choice is even wider: there are 316 90% mortgages around today, versus 228 in April 2011.
What’s more, the average rate for a two-year, fixed-rate 95% mortgage has fallen to 5.52% today from 6.49% a year ago. For 90% mortgages, the rate charged by a typical two-year fix has fallen from 6.05% to 5.45%. This is a relief for borrowers struggling to buy their first homes.
Buy now while stocks last
In summary, there are strong signs that mortgage interest rates on the rise. In addition, the average loan fee today is over £1,500, up a quarter (25%) in three years. Therefore, you should shop around for a better deal before mortgages become even costlier.
In other words, grab a good deal before it’s gone!
Another bubble in the making? Be careful.
It is often difficult for first time buyers to discover which mortgage is best for them. Although, they may do all the research in the world (which is extremely important and highly necessary) advice from an expert in the property market can be invaluable. Although, you may think that estate agents are only looking to get the best deal for them, often the large reputable companies in London such as Chesterton Humberts (www.chestertonhumberts.com) will usually offer you a better deal for your money in the long term. The most important thing for first time buyers is to notice the difference between rushing into a buy or making sensible, executive decisions. If you keep this in mind then you are likely to find a suitable mortgage.