ongoing mortgage misery

Lenders such as Abbey and Nationwide have widened the margins on their tracker products thus wiping out any benefit of the recent rate cut, and some lenders such as Northern Rock have announced that they are not going to pass on the full half point reduction to their standard variable rate.

The main reason for this is that wholesale borrowing costs remain high - the financial turmoil has created such nervousness that banks just don't want to lend to each other. As a result we have seen a severe shortage of funds for mortgages and lenders are having to pay more for the funding that there is.

One of the reasons behind the state intervention we have seen this week was to get banks lending again and bring an end to this impasse. Billions of pounds has been pumped into the system to improve the capital positions of the leading banks, here in the UK, one of the conditions of the Government's bail out of Royal Bank of Scotland, Lloyds TSB and Halifax Bank of Scotland was that they go back to lending at 2007 levels.

So are these initiatives going to work and help bring down the cost of mortgages? Well, Louise Cuming, head of mortgage services here at moneysupermarket.com, is here to discuss it.

Lou have we got any signs yet that wholesale funding is getting cheaper?

Louise Cuming:  Well there is two kinds of wholesale funding, there is the swap rates which are linked into fixed rate mortgages and those are very volatile, but at the moment they are running at a lower rate then they where this time last year, so that is quite hopeful. However, the inter-bank lending rate, the Libor rate, the variable rate, is stubbornly staying above 6%, its actually all over 6.25% either the 3 month, 6 month or 12 month which is bad news really.        

Q2: So that suggests in the short term is doesn't look as though mortgage rates will come down much?

Louise Cuming: For new borrowers I think they wont see any benefit from this big half a percent rate reduction. In fact if you look at the mortgage rates that we are seeing for new products, there is very very little change.  

Q3: Its all quite tough then isn't it, we are really at the stage where the fact that the mortgage market isn't functioning normally seems to be one of the main reasons behind the severity and the slow down of the housing market. Are people really struggling to get mortgages?  

Louise Cuming: They are but on the other hand I think there is so much lack of confidence out there that people have stopped looking.

The main part of the mortgage industry now is people remortgaging and swapping, and obviously they are having problems, but as far as buying is concerned we have seen all the stats to show there just aren't any houses moving hand and that's probably understandable given the kind of turmoil in the market.   

Q4: Talking about remortgages, are people encountering problems there, because obviously one of the things we have seen is lenders tightening criteria, so because there is such shortage in funding they are only lending to people with large deposits and equity in their house.

Are you seeing an increase in the number of people that are effectively stuck because they can't remortgage?    

Louise Cuming: Absolutely, there are more and more people trapped with their existing lenders on SVR because the goal posts have changed, therefore mortgages that were available to them this time last year just aren't because they haven't got equity, because they're needing to borrow more against their income because their income potentially isn't stable. All these kinds of factors are affecting lenders now because, as you rightly say, the big issue is their attitude to risk and they really are tightening criteria.    

Q5: And when it come to Standard Variable Rate (SVR) we have obviously seen some lenders announce that they are not going to pass on the full half point reduction we saw in interest rates last week. Northern Rock is a perfect example, so consequently the margin between Bank rate and SVR is widening which makes it an even more expensive option doesn't it?
  
Louise Cuming: It is, and you know there are two things really, one, Northern Rock, it is affecting the most vulnerable borrowers, but secondly, I have been surprised at the length of time it has taken for some lenders to make up their mind so there will be an awful lot of borrowers out there on tenterhooks wondering if they will get this reduction or not.    

Q5: Do you think the situation is likely to improve in the near future, are there any signs that lenders might begin to relax criteria again to get the market moving?

Louise Cuming: No, in fact we are seeing quite the opposite; only yesterday Nationwide said that they were pulling back on their affordability calculations.

Q6: What does that mean exactly?

Louise Cuming: It means that they're lending less against your income than they did this time last week. So, as far as tightening criteria is concerned we are seeing no change.

What I would say is if you are in the fortunate minority with a lot of equity, stable employment, stable income, then lenders are falling over themselves to lend to you and that is becoming quite a competitive space.

Q7: What is the advice then for people who ring you and our advisers, who perhaps aren't in that category and they don't have much of a deposit or much equity, what are you telling them, is there anything they can do?

Louise Cuming: Well, if they are stuck with their existing lender and they are having financial difficulties then they have got to go and talk, not only to their mortgage lender, but any other lenders for unsecured credit that they have got, because everybody wants to try and help at the moment so it really is worth sitting down and helping.

If you are in a situation where you're stuck with a lender because you haven't got enough equity and you can afford to, it really is a good idea to over pay on your mortgage at the moment.

Q8: And I guess look to see if you have anything in your savings that you could put more into the house to get a better deal?

On the plus side, one of the things is obviously we are seeing interest rates have started to fall and some economists were expecting further falls, with some economists thinking that it could fall as low as 3% by next year from 4%, which is obviously brilliant news for borrowers who have got tracker mortgages and hopefully variable mortgages, although that depends on whether the lender passes on.

Louise Cuming: Yes, there will certainly be some reductions.

Q9: Is that resulting in a higher demand for variable rate products?

Louise Cuming: Absolutely, the percentage of people now on the tracker and variable rate products is massively increased from last year, but again a word of caution because nobody's got a crystal ball, nobody knows what is going to happen so if you are borrowing to the absolute maximum, its still worth considering the fixed rate just for that piece of mind.

Clare Francis: Thanks Lou.