Will the latest bailout end the mortgage crisis?

There was hope that the latest rescue package put forward by the Government to shore up the banking industry would instil some confidence in the market and get institutions lending again. But will it work and help bring an end to the mortgage shortage that is crippling the housing market?

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So far, there has been little in the way of positive signs. Certainly the news on the economic front has all been pretty grim. Banking shares have kept sliding, we’ve had confirmation that the country is officially in recession, home repossessions are soaring and mortgage lending slumped to its lowest level since 2002 last year.

However, we have seen some lenders cut rates in recent days so could this be the start of ‘green shoots of recovery’ in the mortgage market?

A rosier outlook

It’s still too early to say whether the Government’s latest bailout will help alleviate the problems in the mortgage market, but there are signs that the impact of the recent interest rate cuts does seem to be filtering through and benefiting borrowers. 

Interest rates have fallen from 5% to 1.5% since October and this has resulted in cheaper wholesale borrowing costs for institutions. The three-month Libor rate, which is the rate at which banks lend to each other, has dropped from around 6% to 2.20% since last autumn.

This means lenders can offer cheaper mortgage deals. Royal Bank of Scotland/Natwest has launched its ‘lowest ever’ two-year fix at 3.49% – 0.65 points lower than its previous rate. The arrangement fee is £799 and it is available to home buyers who have a deposit of 25% or more. 

Nationwide Building Society also cut its fixed rate mortgages – it is offering a two-year fix at 4.59% with a £599 arrangement fee and a ‘no fee’ two-year fix at 5.09%. These deals are only available to those with 40% or more to put down, however.

Abbey, Leeds Building Society and Alliance & Leicester have also announced a reduction in the cost of their mortgage offerings. 

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The same problem disguised

However, while lower rates are obviously good news for those needing a mortgage, not everyone will benefit. With an increasing number of borrowers defaulting on their mortgage payments, providers are still cautious about who they will lend to so many of the best deals are only available to buyers with a big deposit and those remortgaging who have significant equity in their homes – often at least 25%. 

This means that many would-be first time buyers are still really struggling to find a mortgage, and even those who bought in recent years without much of a deposit are having problems because they can’t remortgage once their current deal ends.

Louise Cuming, head of mortgage services at moneysupermarket.com, said: “There are still very few options available to those who don’t have much of a deposit so we really need to see banks and building societies start lending to these people again. It’s essential for the state of the housing market and for consumer confidence.”

Natural green shoots?

The doors aren’t completely shut to borrowers who have a deposit of less than 25% and there could be signs that some lenders may be willing to relax their criteria.

As part of the announcement of the planned merger between Britannia Building Society and Cooperative Financial Services, a spokesman for Britannia said they plan to increase their mortgage business. Britannia is already one of the few lenders offering a mortgage for those needing to borrow up to 90% of the property’s value. It has a lifetime standard variable rate mortgage at 4.74% with no fees that is available to those with a deposit of 10% or more.

Northern Rock is also going to start lending again. Since it was nationalised last year, the bank has been trying to reduce the size of its mortgage book and had not been offering deals to new borrowers or existing customers needing to remortgage. But the Government said it wants the bank to re-enter the mortgage market again – this is part of its latest bailout plan.

In the meantime, the advice is to try and build up as much of a deposit as possible. While this might mean that would-be first time buyers can’t buy at the moment, at least the weakness of the housing market means prices aren’t likely to get out of reach because you have to hold off – they could even fall further so you might benefit by waiting.

If you’ll need to remortgage this year but don’t have enough capital in your home consider overpaying on your current mortgage to build equity up or look into making home improvements which could boost the property’s value.

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

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