Mortgage impasse - what now for borrowers?

The problems continue for the UK’s mortgage market. Latest figures from the Council of Mortgage Lenders revealed that just 42,000 home loans were granted for house purchases in August - 59% lower than in August last year. With lenders still struggling to raise funds for home loans and concerns about further house price falls persisting life remains tough for anyone needing a mortgage at the moment.

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It was hoped that the decision by the Bank of England to slash interest rates by half a percentage point earlier this month, coupled with the billions of pounds that governments around the world have pumped into the financial system, would help kick start the mortgage market.

However, there is no evidence that conditions are easing, and if anything the situation is getting worse. Watch our latest video ‘Ongoing mortgage misery’.

How the lenders have reacted to the rate cut
Obviously, existing borrowers with mortgages that track the Bank rate, will benefit in full from this month’s half point rate cut, but everyone else with a variable rate deal or those who need a new mortgage are at the mercy of lenders. And so far, a large proportion have not passed the rate reduction on in full.

While tracker mortgages are directly linked to Bank rate, discounted products are linked to the lender’s standard variable rate. On the whole, most lenders tend to pass Bank rate changes on in full to their SVR but a worrying number have opted not to this time around. A few major players including Nationwide Building Society and Northern Rock have announced they will not be reducing their standard rates by the full 0.5 points, while others such as Abbey, have remained ominously quiet about their intentions.

And deals for new customers are becoming less, rather than more competitive as some providers have taken the opportunity to widen their margins, meaning borrowers are getting a worse deal relative to the country’s official rate of interest, than they were prior to the rate cut. Abbey, Nationwide and Woolwich have all increased the rates on their tracker deals.

And it’s not only the rates on mortgages for new customers that are rising, some lenders are also becoming more restrictive about who they will lend to. Nationwide and Yorkshire Building Society now require borrowers to put down a deposit of at least 15%, up from 10% previously. The Nationwide change only applies to its intermediary products.

Lenders say they are having to do this because funding shortages persist so they need to limit the volume of new business they are taking. However, many economists blame the fact mortgages are so expensive and hard to come by as one of the main reasons why house prices have fallen by more than expected. And given that the attempts by the Government and Bank of England seem to have done nothing to alleviate the situation, it doesn’t bode well with regards to hopes for a recovery any time soon. 

So, what does the future hold?
Further Bank of England interest rate cuts are expected in the coming months with some economists predicting the rate will fall to 3%, possibly lower, by the middle of next year (it’s currently 4.5%). This makes variable rate mortgages, particularly trackers, look very appealing and we are certainly seeing increased demand for this type of product.

The recent half point reduction in Bank rate has knocked £63 a month off the repayments of a £150,000 interest only mortgage.

That said, a variable rate loan is not the best option for everyone. While most economists are now predicting further reductions in interest rates, it was only a couple of months ago that the consensus was that interest rates would rise before the end of the year. Things can change very quickly and if you cannot afford to take the risk of your mortgage payments rising, it is always worth opting for the security of a fixed rate.

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I need a mortgage now, what are the best deals available?
If you believe interest rates will fall further and are prepared to take the risk that your mortgage payments could rise if they go the other way, Scottish Widows has a three year tracker at 0.75 points above Bank rate, meaning the current pay rate is 5.25%.

It is available for loans up to 75% of the property’s value and anyone remortgaging gets their legal fees paid and £250 towards the valuation costs. However, the arrangement fee is high at £2,499 for Scottish Widows. Consequently, you may be better off going for one of the leading lifetime trackers because although the rates are slightly higher the set up costs are lower.

HSBC’s lifetime tracker at 5.44% is available for loans up to 90% of the property’s value and the fee is just £499. Those remortgaging receive a free valuation and free legal work and there is also no early redemption charge (Erc) meaning you can remortgage without penalty at any time.

Alternatively Woolwich has a lifetime tracker at 5.59% that is available to those with a deposit of at least 40%. The fee is £995. However, one thing to be aware of with this deal is that unlike most lifetime trackers it does have an Erc which is payable if you redeem the loan before January 31, 2012.

If you would prefer to go for the security of a fixed rate mortgage, First Direct has a two year deal with a rate of 5.39%. It is available for loans up to 80% of a property’s value and the arrangement fee is £1,998. Those remortgaging receive free legal work.
 
Borrowers looking for longer term security can fix for five years at 5.57% with Principality Building Society. A minimum deposit of 40% is required and there is a £999 arrangement fee although the valuation and legal fees are paid for those remortgaging.

Have your say: Are you struggling to get a mortgage? Visit our forum and let us know. Also, vote in our weekly poll – Are you worried that we’re heading for recession?

Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.

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