Split between rate setters over latest rate movement

According to the minutes of the latest Monetary Policy Committee meeting, there was a 7-2 split between the powerful MPC members with regards to the latest interest rate movement that followed the March Monetary Policy Committee meeting.

It appears that two members voted to cut the rate by 0.25% to 5%, including the vice governor of the Bank of England, Sir John Gieve, who backed David Blanchflower.

However, with seven members, including the governor of the Bank of England, Mervyn King, voting to keep rates on hold due to pressures over inflation the interest rate remained unchanged at 5.25%. The Bank of England last cut rates in February by 0.25%, and previously in December 2007, but a further 0.25%.

However, between August 2006 and July 2007 there were five interest rate hikes of 0.25%, so many homeowners are still struggling with mortgage repayments despite the two recent rate cuts.

Industry experts were of a split opinion with regards to whether there would be a further rate cut in March, but with rate setters having to consider inflation risks as well as the risk of a slowing economy. Fears over the slowing economy have been eased somewhat as a result of recent figures that showed a surprise increase in retail sales over the month of February, indicating that consumers were still spending.

In the meantime the US Federal Reserve has slashed its interest rates once again, which means that over the past six months the Fed has cut rates by 3% from 5.25% to just 2.25% in a bid to assist the failing economy and minimise the risk of recession.

Possible future problems for homeowners on IVA programmes

According to a recent report some people on IVA programmes who are also homeowners could face problems in the final part of their IVA term, and could find themselves hit with extortionate interest rates as a result of having to remortgage or borrow against the equity in their home in compliance with a clause that is in the IVA agreement.

This could cause many problems for these homeowners, who could face crippling repayments on the amount that they have to borrow.

An IVA is an agreement whereby the borrower pays a set amount each month for five years, and this money is distributed between the creditors on a pro rata basis. At the end of the five year term any remaining balance is written off.

However, if the IVA has been taken out by a homeowner there is a clause that requires the homeowner to use the equity in the home to put towards the debt, usually in the last year of the agreement, although the homeowner does not have to sell the home.

There are two problems that these homeowners are likely to face, which could see them paying significantly higher rates on the amounts that they have to borrow.

The first problem is that interest rates are probably much higher now than they were when the homeowners took out their original mortgage, so when they have to remortgage or borrow to release their equity the interest rate they pay is likely to be far higher.

The second issue is that because of the IVA they will be classed as higher risk, sub-prime borrowers, and this will also result in paying a higher rate of interest.

One industry official stated: ‘There is a problem here. People in an IVA will be remortgaging into something significantly more expensive.

Not only are mortgage rates higher than when these people bought their houses, but they could well be classified as sub-prime - that is to say as riskier borrowers who need to be charged more to compensate for that risk.’

Interest rates remain on hold for now

The Bank of England has decided to keep interest rates on hold for the month of March, announcing after the most recent Monetary Policy Committee meeting that interest rates would have to remain static at 5.25% despite calls from industry professionals and homeowners to cut rates in order to improve the economy and raise consumer confidence.

The central bank has stated that whilst it understands that many households are suffering financially, and that this is having an adverse effect on the economy and on consumer confidence, it also has to take into account the danger of rising inflation, and therefore deciding on the movement of the base interest rate has become a fine balancing act.

Between August 2006 and July 2007 there were five 0.25% interest rate rises, and this left many homeowners on variable rate mortgages struggling to keep up with repayments.

The situation was eased very slightly when the Bank of England cut the base interest rate by 0.25% in December of last year, and there was another rate cut of a further 0.25% in February.

However, interest rates are still significantly higher than they were before the series or rate hikes began, and there are now concerns that consumers that are due to come off cheap fixed rate deals will be unable to keep up with repayments on their mortgages unless the base rate comes down further.

A number of analysts and industry experts have predicted that the base rate will fall again at least once before the summer, and that there will be further rate cuts in the second part of the year, which could help to bring the base rate down considerably by the end of the year.

However, the governor of the Bank of England, Mervyn King, recently said that interest rates may not fall as fast or by as much as some seem to think.

Alistair wants to shake up mortgage market

According to the Chancellor of the Exchequer, Alistair Darling, longer term fixed rate mortgages for twenty five years are set to become the norm as part of a radical shake up of the mortgage market.

Darling has been pushing for more affordable long term fixed rate mortgages from lenders for some time, after homeowners were hit with crippling costs following a series of five interest rate rises over the past year and a half.

Fixed rate mortgages have always been very popular amongst those looking to enjoy increased financial stability, as the repayments on the mortgage remain the same for the duration of the fixed term no matter what happens with interest rates.

Most people tend to take fixed term mortgages out over two, three, or five years, but Darling wants to encourage people to opt for twenty five years on a fixed rate.

He recently stated: ‘For many households, particularly those on low incomes, fixing the level of mortgage repayments for several years makes real sense. It can also contribute to wider macroeconomic stability.’ He said that longer term fixed rate deals would increase stability and financial security for many households and he urged lenders to look at offering more affordable long term fixed rate deals.

Rising interest rates have made life very difficult for many homeowners over the past year, but in the last three months the base rate has fallen twice, easing the financial strain for many.

However, despite these rate cuts other rising costs have once again added to the financial woes of many households, with increases in costs such as energy, food, and petrol.

Affordability could increase for first time mortgage payers

According to the Council of Mortgage Lenders, things could start easing up financially for first time buyers over the coming months, with interest rate cuts making it easier for this group to afford mortgage repayments.

Last year saw affordability for first time buyers fall to a sixteen year low, with first time buyers paying the highest level of income on mortgage interest since 1991.

Reports show that last year the average first time buyer was paying 19.4% of their income on mortgage interest, which was the highest level in sixteen years, with first time buyers having paid 21.8% of their income on mortgage interest in 1991.

It is thought that the interest cuts that have already been applied as well as those expected over the course of this year.

There has been a marked slowdown in the housing market over recent months, with property prices falling but also lenders tightening their belts when it comes to offering mortgage, which has resulted in lower lending levels.

Michael Coogan from the Council of Mortgage Lenders stated: “The decline in lending appears to be driven more by funding constraints than lower consumer demand.”

One official said: “Affordability has been stretched further in 2007, but the recent base rate cuts and the expectation of future cuts will ease debt servicing burdens in 2008. For first-time buyers, the combination of subdued house price inflation and lower mortgage rates means affordability should ease slowly as the year progresses.”

He also said that the payment shock for those coming off cheap fixed rate mortgages over the coming months would not be as severe as first anticipated due to the decreased interest rates, adding: “The impact of payment shock on the large numbers of borrowers coming to the end of fixed-rate mortgages will also be less than we anticipated last year.”

First time buyers could pay through the nose in mortgage interest

According to a recent report first time buyers could end up paying a fortune in mortgage interest, with recent figures showing that some first time buyers are being hit by the highest interest rates in over seven years.

The information comes from the Bank of England, and suggests that some first time buyers may be forced to pay interest rates that are at the highest level since the year 2000.

The figures show that February saw the interest rates on two year fixed rate mortgages worth 95% of the value of the home rise to an average rate of 6.55%.

It is thought that the mortgage crisis has hit first time buyers hard, with many having very little to put down by way of a deposit, and as a result being financially penalised by having to pay far higher rates of interest on their mortgage borrowing.

Lenders are being far more careful about who they lend to and how much a risk they are prepared to take, and in addition to first time buyers sub-prime borrowers have also been hit hard by the turmoil in the financial markets.

One industry professional stated: ‘Banks are clearly now engaged in more active risk-pricing when it comes to mortgage lending, with riskier borrowers failing to benefit from the fall in expectations of policy rates. For first-time buyers this could clearly be a problem.’

There were just fifty thousand new home loans taken out in the month of January according to the Council of Mortgage Lenders, which further reflects the crisis that has hit the mortgage markets over recent month.

With fewer people able to afford a mortgage and more lenders exercising increased cautions over who they will lend to it seems that the situation could continue to get worse.

Open Market HomeBuy Gets A Revamp

The Government’s scheme to help key workers buy their own homes is to undergo a revamp. After only 2,000 have bought their homes through the Open Market HomeBuy scheme, the Government is to give it a boost by making the interest rate only 1.75% on half of the property.

The intention is to help key workers, who include nurses, teachers, police and social workers get onto the property ladder.

The revised scheme is due to come into force on 1 April, and will enable buyers to combine a conventional mortgage from a bank or building society for 50% of the property with a loan partly funded by the Government at the new low interest rate.

At the moment the rules of the scheme mean that buyers need a mortgage for two thirds of their home, and critics have pointed to this being too high and the reason why the uptake has been so low.

The new rules will mean that anyone seeking to buy a house valued at £300,000 will only need to look for a mortgage for £150,000.

A homebuyer taking out such a 50% mortgage would have to pay interest on the loan for the rest of the funding from day one, and this would be the new low rate of 1.75%. This rises to RPI inflation plus an additional 1% (currently, therefore, 5.1%.

The Government has pointed to its Open Market HomeBuy scheme as a key part of its strategy to help people buy their own homes, but the figures hardly back up that view. Last year, of the 358,000 first-tie buyers, a mere 0.6% of purchasers used the scheme.

The Government had a target of getting 20,000 people into home ownership by using the scheme in its first five years, but up to the end of February last year, only 200 had bough a property using the initiative.

Equity Release Schemes Can Create Unusual Problems

Equity release schemes for the elderly are becoming a popular venture for both home owners and mortgage brokers.

Many elderly home owners are choosing to release equity from their property in order to be able to move into smaller, more manageable accommodation in a process known as downsizing.

As this process is becoming more popular, many mortgage lenders are keen to create mortgage packages to attract this lucrative market.

Recently Norwich Union has introduced two specifically designed mortgage packages, in conjunction with the company Move With US; an ‘all in one’ mortgage package which covers all aspects of moving, from legal fees to surveying.

They are also piloting a scheme which allows home owners to receive 80% of their property’s sale price and the rest of the proceeds are used to cover costs from the mortgage broker.

Anthony Rafferty, Norwich Union’s representative on these schemes thinks the schemes are a good idea as, he says: “Our aim is to remove all the stress from the sales process while enabling retirees to free up cash.”

However, mortgage brokers are discovering to their cost and embarrassment that not all elderly mortgage schemes are straightforward. Recently two cases were reported of elderly couples remarrying but keeping the same mortgage agreement.

In both cases, the person on the mortgage contract has remarried and subsequently died, leaving their spouse living in the property - and leaving the mortgage lender a huge dilemma.

Due to a loophole in mortgage contracts the new spouse was not able to be put on the contract, yet were living in a property which, in the mortgage lender’s eyes, did not belong to them.

Although the mortgage lender does have the right to evict the pensioners, HBOS seems unwilling to damage their public perception by doing so as they have not offered either borrower the option of adding the new name to the mortgage.

Luckily for the pensioners concerned HBOS seems unwilling to damage its reputation and lose their slice in the billion pound equity release market through ruthlessness.

House Prices Down Again

Average house prices across the UK have fallen for the fifth month in a row, according to figures from property information firm Hometrack. The average price is now £174,400 – almost £2,000 lower than in the autumn.

These figures back up recent forecasts that 2008 will see a major downturn in the housing market – if not an out and out crash. A worrying trend has been the low numbers of new buyers registering with estate agents in a period when figures usually pick up.

In the last few years there has been a 25% pick up in registrations in February, compared with January, but Hometrack says this year the increase has only been 7.9%. Thus, demand is unlikely to arrest the price drop.

House prices are beginning to fall in real value as annual house price inflation slips behind economic inflation. In six London boroughs prices have gone up by less than inflation over the past 12 months. Over London as a whole annual house price inflation has been 4.2% for the last 12 months, compared with 13% this time last year.

The best performing borough was Merton, where prices rose 7.7% to £351,600. Camden did well with 6.5% and Hammersmith and Fulham went up by 6.1%. Kensington and Chelsea had the highest prices in London with an average home costing £726,400. The cheapest homes are in Barking and Dagenham, at £158,600.

Cass Business School fellow Peter Hahn said: “Mortgages have been too cheap for too long and now we are seeing the opposite. Loans are harder to come by and more expensive. That means lower house prices. My advice for people is this: don’t buy property now. Wait until prices come down this year.”

Meanwhile mortgage lending bounced back slightly in January from December’s poor showing, according to figures from the British Bankers’ Association. Although house purchases mortgage approvals rose to 44,288 in January from a record low of 42,343 in December, the number was still one of the lowest on record and down 31.3% year-on-year.

A Silver Lining For Housing Market Cloud

Despite falling house prices and the overall UK credit crunch being felt by consumers, there are still some who are willing to get onto the property ladder. As the fifth month of falling house prices proceeds, the effects are starting to flow over into the building trade.

The UK’s credit crunch has seen the largest fall in house prices in the South West and East Midlands, which has shown a significant slowing of the housing market with so far a 1.4% annual growth slow down; the first of its kind since 2006.

However, Richard Donnell, the Director of Research at Hometrack, a housing intelligence business, does not seem to think the housing market is all doom and gloom.

Instead he thinks: “The modest increase in new buyer registrations is evidence of firming demand,” something he attributes to the cut in interest rates by the Bank of England.

His comments are indicative of a possible turn around in the housing market, particularly in areas such as the North of England where previously high house prices have seen many properties going unsold as the mortgages would have been just too expensive for many northern borrowers.

It is not just Richard Donnell who is fairly optimistic about the property market situation. Two of the UK’s biggest builders, Persimmon and Barratt, and other UK building companies are expected to report that reservation numbers for new property have fallen drastically.

It is predicted that they will report a downturn of around 30% in new reservations for the year on year average. Despite this, the building trade believes that the cuts in interest rates will mean that there will be renewed interest in the property market later in the year.

Barratt’s optimistic outlook means that they are continuing with incentive schemes such as their popular ‘Dream start’ scheme which allows first time buyers the opportunity to buy 75% of their property.

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