The reality of low long term interest rates is helping fixed rate deals to come down. After peaking at 5.15% this summer, average two year fixed mortgage deals have fallen below 5% for the first time since the summer.

Remortgaging which was very popular during the boom years has fallen considerably. Many are now opting to stay on a lenders standard variable rate (which was often significantly higher than special discounted rates)

Although, lenders have tentatively started to raise LTV (reduced amount of deposit required), there is evidence, the number of mortgage products could remain limited even as the market recovers.

The UK Treasury have been looking to extend mortgage protection to mortgage lenders who sell mortgages on to third party. This comes after proposals to limit self-certification mortgages, and high income multiples.

It is hoped stronger regulation of mortgages will make it more difficult for the housing market to create a boom situation. However, it will mean first time buyers will need to save a larger deposit in the new climate of stricter mortgage lending.

On a personal note, I benefitted from loose mortgage rules which allowed me to get a mortgage a large income multiple in 2004, but, given the boom and bust we have seen, it does seem to make sense to create a more stable and closely regulated mortgage industry. I’m just glad I’m not trying to buy a house now…

Why Bradford and Bingley Needed Bailout

Since becoming a bank in 2000, it changed its business model from the traditional lender into an aggressive commercial bank.

1. It was happy to lend to ‘risky’ customer, self certification, buy to let e.t.c. It is these customers most exposed from the current decline in the housing market.
2. It also raised money for mortgage finance on the international money markets. This allowed it to expand quickly – becoming 8th largest mortgage lender.

It is this second aspect of its business plan which caused into run into great difficulties. This year, it has struggled to raise enough finance because of the tightening of the credit markets (a similar problem faced by Northern Rock). The reluctance of other banks to lend to Bradford & Bingley was increased when its credit rating dropped.

This year, June, it launched a share rights issue to try and raise finance, but, it was under subscribed leaving the company looking vulnerable and exposed. Its decline in the share price has been dramatic

The government has decided to nationalise the bank, it will sell off the savings section, leaving it in control of the mortgage sector. This leaves a balance sheet of £50 billion in mortgage loans.

If Bradford and Bingley is merged with Northern Rock, the government (and therefore taxpayer) will be liable for a total of £150bn mortgages. It will make the government ‘super bank’ or ‘toxic debt bank’ as the second biggest mortgage lender.

Top 5 Mortgage lenders

Top 10 Mortgage companies (will need updating at end of credit crunch)

Part of the problem is that housing costs have been taking a bigger % of people’s disposable income in the past few years. According to the consumer credit counselling service housing costs have risen from 33% of disposable income to 44%.

Why Mortgage Defaults has increased

• People stretched themselves to get on property ladder.   (house prices trebled in 1996-2007
• Increasing Council Tax
• Rising levels of unemployment. Unemployment rates are forecast to rise sharply over next 12 months as recessions takes hold
• Interest rates still higher than 2005, 2006
• Higher levels of other debt such as credit card debt.
• Falling house prices, leaving investors exposed

This increase in mortgage defaults is likely to cause a rise in the UK sub prime market, even though their are concerns the UK housing market could be mirroring the US housing market.

related

• Adverse Credit Mortgages

• Dangers of Sub prime mortgages

Shortgage of funds on the money markets. This is the biggest problem facing mortgage lenders. Most lenders do not fund mortgages just out of savings account. They fund mortgages by reselling the debt bundles in forms such as CDOs. However, since the subprime defaults in America nobody wants to buy these CDOs. Any kind of mortgage lending is seen as high risk, therefore the funds have started to dry up. This has led to big name lenders closing mortgage accounts and refusing new customers. Recently, First Direct said that it will stop mortgage lending. Other big names such as Nationwide, HSB, Halifax and smaller building societies have all said removed certain types of mortgage products.

• This means it is much more difficult to get a mortgage loan. Lenders SVR are also increasing.

Problems for Those remortgaging.  People who took out mortgages a year ago, were able to benefit from lax lending criteria. e.g. 125% mortgages, self certification mortgages were much easier to get. When they remortgage, they may not be able to prove they earn sufficient income to a new lender. Therefore, exisiting mortgage holders may be unable to remortgage

Negative Equity. With the prospect of falling house prices increasing. More homeowners face the prospect of negative equity. This is particularly a problem for those who bought with a 95% or 100% mortgage. New homeowners are having to save a bigger deposit to get a mortgage.

See also: Credit crisis explained 

However, whether 2008, will see a record year is uncertain. With house prices falling at the end of 2007, and the global credit crunch making mortgages more difficult to secure, 2008 may see a fall in mortgage lending or at least very slow growth.

Despite a consensus showing monthly house price falls, there is also evidence of increased activity in the housing market. Rightmove suggest that many homeowners have been galvanised by falling prices making house prices appear more affordable (link Times article)

There is also evidence that the November and December house price falls may have been due to the rush to get properties on the market before the compulsory introduction of HIPS on the 14th December.

According to Rightmove house prices fell in the 5 weeks upto January 15th by 0.8% to £230428.

• 36% of customers spend more than 10 hours selecting a holiday. Only 21% would spend more than 10 hours selecting a mortgage.

• 41% of customers do not shop around for the best financial products because they don’t have enough time.

This is despite the fact that looking for the best deal online and on the high street only needs to take a couple of hours. For a couple of hours work, the savings on a large mortgage can be up to £2,000. For 10 hours, a £2,000 saving equates to an hourly rate of £200 an hour. (If people are too busy they must have a good job) Reports show that many homeowners never remortgage and end up on their lenders Standard Variable Rate SVR. By remortgaging they could take advantage of lower interest rates and very significant savings

Men are more likely to shop around than women. 55 per cent of women say they do not shop around compared to just 35 per cent of men.

One significant factor is that women get overwhelmed by the choice of financial products on offer.

•  Getting Best Mortgage Quote deal
• Best way to Pay off a Mortgage

• Fool.co.uk 

This research confirms the current mortgage lending of Yorkshire Building society. They say 20% of mortgages are completed online; they also expect this % to increase in the future.

Advantages of Applying Online

• Compare many different types of Mortgages
• Compare different packages and monthly repayments
• Saves time physically visiting banks and building societies.
• Easier to find specialist mortgage providers such as Bad credit and Self Certification mortgages

Concerns of Applying Online

Some of the concerns about applying online included:

• Security concerns 19%
• Not Being able to speak to a Human
• Unwanted Pop ups. (even site pop ups can be viewed negatively)
• Lack of Updates about the progress of the Mortgage Application

In particular the FSA was critical of self certification mortgage lenders. Quite a few were willing to proceed with lending despite the uncertainty of the income for borrowers.

10 of these (mainly) self-certification lenders now face sanctions from the FSA. These sanctions could include a ban on trading until the relevant criteria are met. Another 65 companies are being considered for possible referral

The FSA were keen to point out that the majority of lenders were sticking to agreed FSA rules about borrowing and advice for lenders. The surveys were taken out between June and September of this year. Since their review the issue of unconventional mortgages has gained greater importance due to the sub prime crisis in America.

The council of Mortgage Lenders welcome the FSA review, although they requested that the FSA should be clear about all the rules.

Regulators criticised by FSA

The decline in the number of mortgage approvals is blamed on:

• Government’s controversial home buyers package, which makes it more bureaucratic to put your house on the market
• A stagnating market – less houses are being put on the market
• Declining confidence following the problems of Northern Rock.
•  Global credit crunch leading to less mortgages being made available e.g. Kensington Mortgages withdrawing sub prime mortgages
• Recent interest rate rises having an increasing effect on reducing consumer spending

• Will UK House Prices fall? - have your say

The top 10 lenders offered only 11% of the best 250 mortgage deals. This is despite the big 10 having more than 60% of the market. Many of the best deals were from smaller building societies, who haven’t demutualised. (see top 10 building society lenders)

One of the worst performers was HSBC, which had no mortgage deals amongst the best 250.

This suggests that high profile brand names are able to exploit consumer loyalty and charge higher premiums. However, there is no reason to avoid getting a mortgage with a lesser known building society.

Switch to the smaller building societies and potentially benefit from significant savings.

See also:

• Getting Best mortgage quote deal
  
• Guide to Remortgaging
• Top 6 Mortgage Lenders in UK