Moneysupermarket.com editor Clare Francis speaks with Louise Cuming, head of mortgage services, to discuss The Bank of England's new initiative aimed at easing the concerns faced by mortgages lenders. Nervousness within the market has seen many lenders increase the cost of borrowing for consumers. Will this Government-backed plan help to ease the funding crisis?
Video Transcript
Clare Francis: The Bank of England has launched a Government-backed initiative aimed at easing the liquidity squeeze mortgage lenders face. Under the scheme lenders will be able to swap mortgage debt for government bonds.
Financial institutions are nervous about lending to one another at the moment because they still don't know exactly what exposure they each have to the US sub-prime mortgage crisis. As a result there's been a severe shortage of funding available on the wholesale market for loans and mortgages. Consequently this has pushed up the cost of borrowing for consumers.
It is hoped that the facility of being able to swap mortgage-backed securities for government bonds will help alleviate this funding crisis, because the bonds should be more easily tradable on the financial markets in the current climate. But will this plan work? Let's ask Louise Cuming, head of mortgage services at moneysupermarket.com.
Q1: So Louise, is this initiative the answer to mortgage lenders' prayers?
Louise Cuming: Well, I think borrowers would certainly hope so, because they'll be expecting to see rates plummet with all this injection of cash. However in reality that just is not happening and lenders are still retaining and increasing mortgage rates.
Q2: We've seen two of the countries largest lenders make changes in the last few days. At the end of last week Halifax increased the rates on most of its mortgage range and earlier this week Nationwide has made changes - can you just explain what they've done, and why they've done it?
Louise Cuming: Well basically, as far as Halifax is concerned obviously they're putting up their rates - and they're not just tweaking their rates now. In many cases we're seeing rates go up by over half a percent, which is really significant.
Clare Francis: So is that Halifax effectively saying it doesn't want to take in any new business at the moment?
Louise Cuming: Halifax are saying that they only want the business on 'their terms', and 'their terms' is that they make a lot of profit.
Nationwide are taking a slightly different stance. They're tweaking their criteria, so if you want 95% lending from Nationwide, then you can only get that direct - you can't go through an intermediary and get advice on the whole of the market. And secondly, they are restricting the big loans that they're doing, so from a Nationwide point-of-view the largest loan they'll now do is £500,000 - which in today's market is certainly not that big.
Q3: And how can lenders get away with this? Obviously as far as consumers are concerned they'll think that the Bank of England and the Government are doing their bit to try and bring down the cost of funding, and that the Banks and Building Societies should be doing the same thing. So how can they justify putting rates up?
Louise Cuming: A lot of these funds that are available are not available for what is seen as riskier lending, so they just can't get funds for 95% mortgages or above, or for people who have maybe had some problems in the past, so although the funds are available they are only available for a small proportion of lending.
Q4: So what should consumers do? As far as new borrowers are concerned if you can't get a mortgage unfortunately you can't buy a house at this present moment, but what about people who are already on the property ladder and already have a mortgage? Is it still worth remortgaging or are they better off just switching on to their lenders Standard Variable Rate (SVR)?
Louise Cuming: Well, it really depends on your circumstances. Some of the SVR's out there are fairly competitive, so if you're with a lender with a fairly competitive SVR then you do need to compare that to what's on the market; but not only the rate that's available but of course the fee you need to pay to get that rate - which we've all seen have been quite extortionate.
But the other thing is not to wait and see, because what we've seen is a lot of borrowers thinking 'there's £50 billion going into the mortgage market, we'll really start to see some significant lowering of interest rates, so lets wait and see what happens' - that isn't what is actually happening.
As you've already said, we've seen Halifax put their rates up. From a best-buy point of view, three of the best-buys that were available on Friday (the 25th April) have been withdrawn, so the best rates are going really quickly.
So our advice is that if your deal is within six months of coming to fruition, start looking around now, because I can't see this situation getting any better by the end of this year.
Q5: And the other thing obviously is that if you do apply today then the mortgage offer will remain valid, usually for three and six months - is that the case?
Louise Cuming: Once you've got a mortgage offer then that is on the whole binding, so you've bought into those funds for when you're ready to use them, so if you can find a lender that keeps an offer open for three to six months, and they've got a good deal, start the ball rolling now and just wait until the right time to take them up on it.
Clare Francis: So the key message then is to act quickly, and to not wait for things to get better, because in the short term they probably won't?
Louise Cuming: Absolutely!
Clare Francis: Louise, thanks very much.
Louise Cuming: Thank you.
