Articles June 2010

Improvement for 1st time buyers?

Over recent years things have gone from bad to worse for many non-homeowners that may have been hoping to get onto the property ladder. After years of soaring property prices many would be first time buyers will have been pleased to learn that prices starting plummeting following the onset of the global credit crunch in the latter part of 2007.


However, just as things looked as though they were on the up first time buyers were hit with a plethora of new problems, with the global financial meltdown resulting in severe restrictions on mortgages. This also led to banks increasing the level of deposit that they wanted from first time buyers, making it impossible for many people within this group to scrape together the minimum deposit that lenders were demanding to get an affordable mortgage.


The global credit crunch and he recession left many first time buyers hoping that their luck had changed and that things would ease off. For many this marked the chance of being able to get a property at last. However, this is not what has happened according to recent reports. Despite the recession being over and reports that banks were being more relaxed over lending first time buyers are still in for a bad time.


A number of reports have claimed that the banks are being increasingly cautious about mortgage lending and are still only offering their best deals to those that have a fairly sizeable deposit. This means that first time buyers need to be able to stump up a fair amount of cash towards a property if they want to get a mortgage that is affordable.


A number of things are thought to be affecting the decision of banks to continue their caution when it comes to mortgage lending. One has been the uncertainty over the running of the country resulting from the hung parliament following the general election recently. Whilst this is some way to being sorted, with leader of the Conservative party, David Cameron, now named as Prime Minister the country still finds itself in a situation that it has not seen for decades in the form of a coalition government formed with the Liberal Democrats.
Another of the factors thought to be affecting mortgage lending is continued uncertainty over jobs, with banks loathe to take the risk of lending in a climate where the risk of job losses is high.

Lloyds cracks down on onterest only mortgages

Over the years interest only mortgages have become popular amongst certain property purchasers, such as first time buyers that want to keep repayments down and those on lower incomes. With interest only mortgages the borrower repays only the interest on the loan over the specified term, which means that at the end of the term the actual loan itself still needs to be repaid.


The idea is that when these mortgages are taken out the borrower also sets up another investment so that over the years they can raise the money to pay the loan off in full at the end of the term. However, officials believe that many people that took these mortgages out had no plans in place to save for repayments of the loan at the end of the term, and many were simply relying on the value of their property increasing sufficiently to sort out the loan.


Lenders have become far more cautious about taking risks over the past couple of years, since the onset of the global credit crisis, and according to recent reports have now started to crack down on risky interest only mortgages. Many lenders have been reluctant to deal with interest only mortgages for some time, but more and more are now set to become wary of these deals according to reports.


One banking giant, Lloyds TSB, is said to have already started its crackdown on interest only mortgages, and has placed a cap on the amount that customers can borrow without repaying the capital. It is now thought that other lenders will quickly follow suit in terms of clamping down on these mortgages.

A £billion spent on HIPS

Earlier this week the new coalition government announced that it was abolishing Home Information Packs, or HIPs, other than keeping one element of the pack, which was the EPC or Energy Performance Certificate. The packs have caused huge controversy since they were brought in by Labour in 2007, with homeowners loathe to spend the hundreds of pounds required when trying to sell their homes.
According to recent reports homeowners in the UK have spent an astonishing £1 billion on these Home Information Packs since they were brought in, and many officials have branded this a complete waste of money adding that the HIPs were pretty pointless.
Estate agents across the nation have welcomed the new government’s decision to abolish these packs just a few days after coming into power. For estate agents the need for HIPs caused a number of problems, including a reduction in properties being sold because of the additional cost and also potential delays with property sales due to the need for the pack.
The report claims that around 2.7 million homeowners have been forced to pay for one of these packs in order to sell their homes, but that in the most part those buying the property didn’t even bother to look at the information in the packs. The new housing minister, Grant Schapps, said that he was keen to get on with ‘cutting away pointless red tape that is strangling the market’.

Drop in mortgage lending in April

The mortgage lending figures for April in the UK have suffered a fall according to recently released figures. The figures were released by the Council of Mortgage Lenders earlier this week, and showed that in April gross mortgage lending fell by 12 percent.


The figures from the Council of Mortgage Lenders showed that the level of mortgage lending for the month reached a value of £10.2 billion. This marks the lowest level of mortgage lending in the UK during April for ten years according to reports. The figure reflected a £1.4 billion drop compared to the previous month, with mortgage lending levels for the month of March coming in at £11.6 billion.


The level of mortgage lending this April was also down by 1 percent compared to April of last year, when the mortgage and property markets were still severely depressed. Officials from the Council of Mortgage Lenders said that there were expectations of a slight decline in mortgage lending for the month of April due to a number of factors, including when the Easter holiday fell this year.
However, despite the discouraging figures the Council of Mortgage Lenders has said that the mortgage market is still on target at present to reach its aim of lending £150 billion in mortgage loans over the course of the year.


Whilst the mortgage market has seen some level of recovery over recent months there are still a number of problems facing groups such as first time buyers. Many are still being expected to raise a fairly sizeable deposit by lenders, which is hampering their efforts to get onto the property ladder, and these demands are being made due to the financial difficulties that are still affecting some of the banks themselves as they try to recover from the financial crisis.

Property prices increase

According to data released by a High Street lender property prices have increased again in May, and the average property price is now closing in on the peak achieved in 2007 before the inset of the global credit crisis sent property prices tumbling. The data has been released by the Nationwide Building Society, which has reported a 0.5 percent increase in May, taking the average house price to £169,162.
Despite the increase in property prices the lender did warn that there was a shortage of properties on the market for sale, which meant a low level of property transactions that was affecting property prices. Since February of last year average house prices have increased by 12.2 percent according to the lender, and the average house price is now only 9.5 percent lower than the peak in 2007.
In terms of monthly increases the level of the increase seen in May was lower than those seen in March and April, with the May increase coming in at 0.5 percent compare to 1 percent in March and 1.1 percent in April. Officials have said that whilst the news of rising property prices will be welcomed by homeowners the lack of transactions in the housing market had remained relatively low since the end of last year.
One industry official said that stock shortages and low interest rates had been lifting house prices, but added that it was likely that more properties would come onto the market as a result of the government getting rid of Home Information Packs.

New Article May 2010

Lloyds TSB and Cheltenham & Gloucester, one the UK's biggest mortgage lenders, has announced that it will scrap its ultra-low standard variable rate mortgage for new borrowers.

In a move similar to one made by Nationwide, the UK's largest building society, Lloyds will allow existing customers to remain on the SVR of just 2.5% - one of the lowest - but new customers will find themselves on a different and significantly higher SVR once their initial special rate runs out. That 'homeowner variable rate' will be 3.99% and will be set at the discretion of the bank. Lloyds said the new rate reflected the 'ongoing substantially higher cost of funding'. 

The move is similar to one introduced by Nationwide in April last year, when it said new mortgage customers would revert to its standard mortgage rate of base rate plus 3.49%, when their deal ended, rather than its base mortgage rate of 2.50%. 

The mutual revealed in its annual result on Wednesday that customers on its base mortgage rate were costing it more than £450m a year compared with the rates being charged by its competitors. 

In a normal mortgage market homeowners typically stay on their lenders' SVR only for as long as it takes them to remortgage to a better deal. But plunging interest rates, combined with the tighter credit scoring criteria introduced by lenders following the credit crunch, have left many borrowers better off staying put. 

Lloyds Banking Group declined to say how many Lloyds TSB and C&G borrowers were currently on its SVR, but all mortgage customers with the brands will either be on the rate or have access to it when their deal expires. 

The group stressed that the move would not affect any other of its mortgage brands such as Halifax and Intelligent Finance, while existing customers would only revert to the new rate if they transferred to a new deal or increased the amount they borrowed, and then it would only be the new borrowing that was subject to the higher interest rate once their mortgage deal ended. 

It added that at 3.99% the new rate was below the average charged by the major lenders, although it is higher than the 3.5% that borrowers at Halifax, part of the same group, revert to. 

In January, Skipton Building Society announced that it would hike its SVR from 3.5% to 4.95% despite the Bank of England keeping base rate on hold since March last year. 

The shock rise left leave many of its 125,000 borrowers scrabbling to find an extra £122 a month to meet repayments on a typical £150,000 loan. 

Interest-only mortgages crackdown begins
By Becky Barrow and Simon Lambert


The long forecast crackdown on borrowers who take out large mortgages with no means of repaying the loan beyond hoping their property soars in value has begun in earnest.

The past decade saw a boom in cheap interest-only mortgages from borrowers who had no plans for repaying them.

But the City watchdog the Financial Services Authority signalled in its recent mortgage review that it wanted lenders to get much tougher on the mountain of interest-only loans.

Now Lloyds, which owns Halifax and the Bank of Scotland, has put a cap on the amount buyers can borrow without paying back the capital.

And experts have warned that the move will prompt copycat changes by its lending rivals. Other banks and building societies are also already cracking down on interest-only borrowers, forcing them to pay higher rates, larger fees or specify exactly how they will repay the loan.

Interest-only mortgages are hugely popular because they are much cheaper than repayment mortgages.

The homeowner pays the interest bill every month, but not a penny of the actual loan.



The mortgages became extremely popular during the 1980s and 1990s thanks to the boom in endowment policies, which ran as an investment alongside them to pay off the loan. But as endowments fell out of favour and house prices soared, borrowers continued to take out interest-only loans but without any investment plan to pay them off.

Of the 11.4m mortgages in Britain, about 43% - by value - are interest-only. For millions of young people, the deals are the only way they can afford to get on to the housing ladder.

But Lloyds, which is 41% owned by the taxpayer, will no longer hand out an interest-only mortgage for anyone who wants to borrow more than £500,000.



A new charging structure also means that homeowners on interest-only deals will be charged a rate 0.2 percentage points higher than a repayment deal.

And Lloyds has changed the way borrowers will be allowed to pay back the capital of the loan. It will no longer accept some of the most common methods, for example selling the property, selling a business or coming into an inheritance.

Melanie Bien, director of the broker Savills Private Finance, said the days of the interest-only mortgage were numbered.

'Lenders see them as being extremely risky, and they would much prefer everybody to have a repayment deal,' they said. 'There will be fewer and fewer of them, and they could eventually disappear.'

Within hours of the Lloyds announcement, another top lender, Nationwide, said it was reviewing its interest-only mortgage offer. Other lending giants are already taking a much more cautious approach.

Santander, owner of Abbey and Alliance & Leicester, has cut its maximum loan size for interest-only deals from 85% of the value of a property to 75%. Homeowners who can afford a repayment mortgage are able to borrow 90% of the property's value. Yesterday a Santander spokesman said it would 'closely track developments in the marketplace and continue reviewing our strategy on an ongoing basis'.


The FSA report highlights that 'the vast majority had no repayment vehicle specified'.

That cames as the popularity of endowments waned and people found it harder and harder to get on the property ladder as prices soared. Never mind though, the theory went, the property will be worth much more by the time we sell.

Essentially, this chart shows a large number of people with no idea, beyond hoping house prices will rise, how they will ever clear their mortgage. When house prices stop rising that becomes a problem - but that couldn't happen here like it did in Japan could it?


How borrowers hope to pay off their mortgages

Borrowers putting off working out how they will repay their mortgage could claim to be expecting a family inheritance but in many cases they receive less than expected or the relatives live longer than expected.

David Hollingworth, from the mortgage brokers London & Country, said lenders were scrutinising their interest-only deals.

'The move by Lloyds is the start of a trend,' he said. 'When the biggest lender makes this kind of move, it just signals that that is where the market is going. For millions of people it should be a wake-up call. How exactly are you going to repay your mortgage?'

The temptation to take out an interest-only mortgage is the huge saving. On a 25-year £150,000 mortgage at 4%, the monthly payments would be £500, compared to £792 with a repayment deal.

Mr Hollingworth said many people promise themselves they will switch to a repayment deal after two years, but don't get round to it because they are on such a good rate.

Yesterday Lloyds commercial director Stephen Noakes said: 'As interest- only has become a more popular choice, it is the right time to review our approach.