House prices have fallen about 20% over the past year, which is more than many analyst were expecting. And one of the reasons for this is being put down to the shortage of mortgages which has been caused by the credit crunch and the fact that a lot of people have simply just struggled to get a mortgage, but there are signs recently that things may be beginning to improve….
So, I’m with Stephen Noakes today, who is the mortgage director of Lloyds Banking Group, just to see whether or not we are seeing signs of improvement in the market.
Q1: So Stephen, are we seeing the green shoots of recovery, so to speak?
Stephen Noakes: So there’s no doubt that the mortgage market is still depressed, so the numbers that the Council of Mortgage Lenders (CML) produced for March actually showed that the amount of mortgage lending was up over February, but it’s still down about 50% versus the prior year.
But within that we are seeing some encouraging signs. So importantly, if you look at the data which the Royal Institute of Chartered Surveyors provides, the number of people looking and enquiring about property purchase is actually the highest now since March 2003.
Q2: And obviously one of the reasons for the shortage of mortgages has been the fact that the banks have been struggling to raise funds. Is that pressure easing? Are funds more readily available now because the government has done a number of initiatives to try and pump money into the markets?
Is that helping you offer more products to people?
SN: So if you look at an industry level, there is no doubt there is still pressure on funding. I mean, the way mortgages are funded is that they really come from two sources. Firstly the wholesale markets, and secondly retail deposits.
The wholesale markets since [the] credit crunch have been very limited in terms of access and obviously with the pressure on interest rates at the moment, very few people are actually putting additional money into retail deposits, so there’s no doubt that pressure on funding continues. But for a bank like ourselves, we’ve still got access to good funds and that’s been helped more recently by the work we’ve done with the Government on the Asset Protection Scheme, and we’re continuing to lend to a number of customers.
Q4: Do you think mortgage rates will get any lower or do you think they are as low as they are going to get?
SN: So we have seen really over the last few weeks those have stabilised, so the short answer to your question is it’s pretty much the bottom of the market, and the key message we’ve been giving to customers now is really to look very closely about whether now is actually the right time to fix into that new deal.
Q5: Because there has been a lot of reports recently about demand for fixed rate mortgages - having increased significantly over recent months as people are looking to do exactly that – perhaps lock-in at what may be the trough of the market?
SN: Well, I think an important point is there are still some forecast declines in house prices. So for people who are sitting at the moment where their situation is may be they’re on a loan-to-value (LTV) of about 80%, if they wait too long, and then they try and remortgage when they’re perhaps below a key point which is 75% LTV, the price they may have to pay may be greater than if they take a deal now - so it is important not to wait too long and sit on that standard variable rate before making a move and getting a new mortgage deal.
Q6: What about loan-to-values because the other problems has been that a lot of lenders have been asking for bigger deposits so if you have you only need to borrow 75% of the properties value or less there has been a lot of mortgage to choose from, anything above that, which is particularly hitting first time buyers or those that bought in the last few years with a small deposit means there has not been that much choice and what is available is a lot more expensive.
Is the market opening up for people with 10% deposits?
SN: I think there are a couple of points there. Since the back end of 2007 the number of deals available for people certainly above 90% LTV has almost reduced to zero. Across our brand portfolio – and that’s with the Halifax brand, the Lloyds brand the C&G brand – our maximum lending is at 90% LTV and the reason we cap it at that level is with the future reductions in house prices still forecast, we don’t think it would be acting responsibly to encourage customers into a situation of negative equity.
But we still are very active in lending all the way up to 90%. Other lenders take different positions and they’ve got cuts which work at different levels, and there’s no doubt that perhaps acting more aggressively in the lower LTV area, but for us - because of the size that we have in the market place – we believe it’s important in terms of making sure that we are providing financing to all our customers, and that’s all the way up to 90%.
Q7: How competitive do you think you are going to be going forward, because obviously now the Lloyds Banking Group - following the merger with HBOS - as you say you have got lots of brands; there is Cheltenham and Gloucester, there’s Halifax Bank of Scotland, Intelligent Finance…
All these brands operating within one big organisation, does that mean that competition is going to reduce or are the brands going to compete against each other?
SN: Competition definitely won’t reduce. You’re right in terms of the fact that we are by far the largest player in the mortgage market, so it’s nearly 1 in 3 of the mortgages that we actually provide to the UK. The reality is that brands appeal to different customers. We’ve got no desire to reduce the size that we’ve got in the mortgage market, the number of customers that we’re actually supporting at the moment, so we’ll continue to use a number of different brands. That will therefore mean that a number of brands will have slightly different products, slightly different prices, and there will still be the choice for customers in terms of getting the deal that suits them.
Q8: And what does the impact of the fact that the Government and the taxpayer own a majority stake in Lloyds Banking Group now; what does that mean with regards your ability and flexibility, with regards to pricing and product launches and stuff?
SN: That will have very little difference in terms of the way we do business on a day-to-day basis. One of the things that has been in the press recently is the deal that we struck with the Government with regards to the Asset Protection Scheme, and as part of that we’ve committed £3bn of incremental lending to stimulate the housing market.
Q9: Can you just explain what the asset protection scheme is because I think a lot of people don’t understand it?
SN: Yes, certainly I can. So essentially this is an insurance scheme, and essentially the deal that we’ve struck with the Government is to say that for part of our lending book, which is deemed to be higher risk, we have an insurance scheme against that, and the Government essentially is saying ‘you have to pay an excess’ – like you would do on a normal insurance scheme – but they will provide protection against the balance of that.
There have clearly been conditions on that because the Government are looking to do that because it’s in the right interests of the broader UK community, and one of the conditions of that is increasing lending commitments in both the business sector and indeed on the mortgage sector, and as part of that, as I said, we’ve committed £3bn of incremental lending in the mortgage market.
Q10: Can we just talk also about the outlook of interest rates because obviously with interest rates having fallen recently but they’re now at 0.5% and can’t really get much lower, what’s your view of where they will stay and how long they will stay at this level – are they going to start rising again quite quickly.
SN: The current outlook is that the interest rates, now having got down to 0.5% - which is the lowest on record – they are likely to stay at that level certainly through this year. In fact actually there are some pundits which actually believe they may actually remain constant through into 2010.
Those who are trying to kind of forecast which way they would go; it’s now more likely the next move would actually be up. But if you listen to what the Bank of England had been saying, it’s unlikely they will take further action on interest rates – they’re now looking at actions which they believe are important to stimulate the broader economy.
Q11: So as far as interest rates and mortgage rates go we are heading into a period of stability?
SN: Correct, we are, absolutely.
CF: Thank you Steven
SN: Thank you.