Mortgage Advice

Recent reports paint a mixed picture as to the direction of travel of the UK economy.  On one hand we read that expansion has been reported in the service, construction and manufacturing sectors, but conversely retail sales during February fell against the same period in 2011. The UK economy is widely forecast to avoid a further quarter of contraction and thereby in doing so technically avoid recession, although likely growth forecasts suggest that we may only just be into positive territory with some pundits suggesting growth of a mere 0.1% n the first quarter.

The governor of the Bank of England was quoted some while back as suggesting that the growth trajectory of the UK economy was likely to “zigzag” during 2012. This certainly does seem to be the case in that we had relatively strong growth in Q3 2011 of 0.6%, followed in Q4 by contraction of 0.3% and now with possible Q1 growth of 0.1%, no sustained pattern appears to be emerging.

The Eurozone crisis that dominated the economic and political agenda latterly in 2011 and early 2012 has overcome its primary concern, that of agreement to and Implementation of the Greek debt crisis and as a consequence having agreed the bailout provided a period of calm to the markets but the last few days or so have once again seen reports of Spain and Italy having to pay what were previously considered unsustainable levels of interest to investors to purchase their debt, suggesting that the problem far from having gone away has just moved on.

 I recently read a report that suggested that if the proposed Basel 3 capital adequacy rules were to have been applied in June last year 27 out of 48 of Europe’s leading banks would have been short of the proposed 7% Tier 1 Capital they would be required to hold representing some E243bn Euros. This goes some way to explain the continued shortage of funding and reluctance to lend to all but the very best perceived risks.

To put this into some degree of context for the mortgage and housing market in the UK we witnessed an apparent increase in appetite amongst mortgage lenders certainly during the first nine months of 2011 and this culminated in the number of products available to intermediaries reaching a post 2008/09 credit crisis peak in November and the average cost of 2, 3 and 5 year fixed rate mortgages reaching effectively all time low levels.

In the five months since then we have seen a significant reduction in the overall number of deals and a small but sustained rise in each of the last five months in the pricing particularly of fixed rate deals. This demonstrates both less appetite amongst lenders and knowledge that the current level of borrower demand can sustain the increase in price that has been applied.

Notwithstanding these hurdles the Royal Institute of Chartered Surveyors (RICS) report that 9% more surveyors report increases in buyer enquiries than report decreases and this is reflected in our own company’s activity levels of the last few months. The test of the market will be to see if this “growth” can be sustained now that the Stamp Duty Land Tax exemption has ended and with the upcoming series of events and holidays including the Jubilee celebration, the European Football Championships, the Olympics and Paralympics.

The announcement of a rise in the Standard Variable rate of interest charged by the Halifax came as something of a surprise but provides a salutary reminder of just how things can change. The rise from 3.5% to 3.99% effective from the 01 May 2012 is estimated to increase the cost of their average borrower’s mortgage by some £16 per month and although this will be unwelcome for those affected the new rate of 3.99% is still one of the lowest in the market. 

Many people will be asking why this has come about now when the Bank Base Rate (BBR) remains at an all time low level and commentators have once again suggested that we will see no rise in BBR until possibly 2014.

When the Base rate was slashed in the final quarter of 2008 and first quarter 2009 no-one realistically expected rates to remain at these all time low levels for any length of time! The reality is that such has been the economic impact of the financial crisis and the ensuing global recession that triggered, Central Banks around the world and in particular, the Eurozone, the US and the UK have been forced to hold down rates and provide massive financial stimulus to support their economies, to prevent mass unemployment and a collapse in living standards and spending power.

One of the principle beneficiaries of the slashing of interest rates has been the vast majority of mortgage borrowers. Four years ago the typical SVR in the market was circa 7%, today it is around 4.1%. This marked reduction in the cost of mortgages has enabled many borrowers to weather the financial downturn far better than if no central bank intervention had taken place.

Lenders like Halifax have been faced with increased costs of funding both in wholesale markets and in the rates they are having to pay depositors to attract savings, although everyone recognises that here too rates on offer to savers are but a fraction of where they were three or four years ago. Furthermore these lenders have large retail distribution costs with extensive and very expensive branch networks.  All lenders are under pressure to maintain their margins and it appears that we have reached the point where the UKs largest lender is making the first move in starting what will be a slow but inevitable upward movement.

For those borrowers who are on SVR, dependent upon their loan to value some will be able to take advantage of an internal product transfer often providing a fixed rate for a defined benefit period, which may result in them incurring little or no increase in monthly outgoings. Others may wish to take a product transfer now to guard against any future increase or look at other remortgage opportunities available in the wider market.  Others due to their level of equity, employment or personal credit circumstance will not benefit in the short term from a product transfer or will be unable to remortgage elsewhere and will have to stay put and incur this increase and any future increase that the lender chooses to levy on them until such time as prices rise and they can consider alternatives.

Data for the fourth quarter of 2011 tell us that the UK economy fell back once again into negative growth territory recording a -0.2% decline according to the initial set of results from the Office of National Statistics (ONS). Historically these figures are subject to amendment, both upward and downward however this did not come as a surprise as most economic commentators had forecast these results for a while. What is less clear is, will the UK manage to avoid a second consecutive quarter of negative growth come the publication of the first quarter of 2012 results and in so doing avoid a technical recession?

There is some slightly better news on the horizon with both manufacturing and service sector indices that track growth in orders and activity moving strongly into positive territory indicating expansion in these sectors. Inflation is now starting to fall as was predicted by the BOE and this should start to feed through to reduce the squeeze on hard pressed consumer pockets. 

I recently attended a presentation by a leading overseas banking group’s chief economist and one of the largely unnoticed factors that he highlighted in terms of putting more cash into consumer pockets during 2012 was that of the payment protection redress (PPI). This is a significant amount of money, estimated to be £7bn that is already in the process of being repaid to credit card and personal loan borrowers who were mis-sold PPI.

For many people the amounts will be quite significant, often several thousand pounds and for most this is cash that they will not have anticipated or specifically budgeted for, so it is hoped that much of it will be used on the type of discretionary purchases that consumers have been largely avoiding since the onset of the credit crisis.

On the housing and mortgage front we have seen a fairly positive start to 2012 with more purchasers buying property and refinancing existing arrangements relative to the beginning of 2011. Mortgage product numbers in overall terms surprisingly reduced a little in January over December but remain more than 20% above last year and perhaps more importantly we have significantly more products at 90%, 95% and even the odd 100% LTV deal meaning more borrowers with lower levels of deposit can potentially access the market.

In speaking to a number of our advisers in recent weeks one of the issues that is increasingly apparent are that potential borrowers, the traditional first time buyer with perhaps a 5% deposit are just not engaging the market. This is in large part due to the almost wholesale withdrawal of lenders from offering high LTV – low deposit mortgages during 2008 / 09, for the reasons that borrowers are well aware of. What has not happened to the same degree is that as lenders have started to rediscover their appetite, albeit in a more responsible and conservative manner that message is not getting out to those prospective buyers.

Advisers comment that they are seeing some first time buyers, often supported by parents to supplement deposits up to 10% or 15% meaning that they can borrow at lower rates of interest but not all prospective borrowers have that luxury. The mainstream press in the last couple of years have consistently put out the message that borrowers need a 20% or 25% deposit to access the market and to a degree they were correct, however the market has and is changing and evolving and we need to get the message out more loudly that mortgage deals are available for borrowers with lower levels of deposit.

2011 is now behind us and although for the wider economy the news has in general been somewhat downbeat it was a year for the mortgage market where further stability returned and a significantly greater degree of confidence was re-established particularly within the intermediary sector.

The final year end gross lending numbers for 2011 are at the time of writing still to be published however although the overall total is unlikely to be above 2010, activity during the four months prior to December had been running slightly ahead of the corresponding months a year earlier.

2012 is unlikely to see any pickup in overall volumes, indeed the CML are forecasting that the overall market this year may be slightly lower than 2011 due in part to the challenge on disposable incomes, fears around unemployment etc,  but we do envisage significant price competition to remain in the main mortgage market sectors. Most lenders have lending targets which for the majority will be similar to 2011 but for several of the mutual organisations will be significant step up on last year. This augers well for new borrowers and should mean we continue to see a healthy degree of price competition and some further product development and innovation.

Already since the beginning of the year we have seen Aldermore one of the more recent mortgage brand entrants increase their maximum loan to value on their buy to let proposition from 75% to 80%.  Accord Mortgages have joined other recent re-entrants in the shape of Woolwich and Nationwide in offering 90% loan to value mortgages to residential borrowers enabling more buyers to access the market with lower levels of deposit or equity.

Overall mortgage product numbers in the market ticked down a little during December as you would expect due to the seasonal slowdown but a number of brands have refreshed and re-priced their mortgage propositions already for the new year and we expect to see numbers continue a slow rise providing further choice for borrowers as we move further into 2012

Although the mortgage market is nowhere near the size of four and five years ago it is in much better shape than we dared to hope in the later part of 2008 and early 2009. Assuming that the politicians are able to come up with a credible plan to address the sovereign debt crisis, that the  Eurozone does not suffer some cataclysmic meltdown and as a consequence cause the sort of paralysis that affected us all three years ago we should see the market continue to build on the progress that has been made.

Today has seen the publication of the much anticipated Mortgage Market Review with the FSA setting out its proposals on changes it wants to bring about in the mortgage arena. Key requirements include; – lenders must verify income and be able to demonstrate that the mortgage is affordable, they must also take account of future interest rate increases and how this may impact on borrowers. Mortgages must be assessed on a capital and interest repayment basis; lenders cannot accept speculative repayment strategies, such as reliance on increased property prices.

Lenders will be allowed to waive affordability rules for new mortgage contracts, providing the borrower has a good repayment history. Intermediaries will not have to assess affordability but will be required to determine whether the consumer meets the lender’s expected eligibility criteria.

Non-advised sales will be banned, this measure in particular will be seen by intermediaries as leveling the playing field as currently many bank and or building society customers receive a level of service termed  “information only” when engaging directly with these organizations but in many instances believe they are receiving “advice” when in fact they are not. Consumers such as high-net-worth individuals will be allowed to opt-out of receiving advice and purchase on an execution-only basis.

The trigger points for presentation of the KFI will change reducing information overload for consumers. A KFI need now only be provided when a recommendation is provided whereas formerly rules required a KFI had to be provided each time a consumer received information about a product specific to the amount they wished to borrow.

The current Initial Disclosure Document (IDD) will be removed with a requirement for firms to disclose “key messages” to the consumer and these would include any limitations to their service in the form of products.

A number of former proposals that the FSA were advocating have been dropped from the latest document and this change of direction we believe will in general be welcomed by the intermediary and lender community. This change in requirements suggests a more realistic and pragmatic approach by the regulator in delivering its objectives of a more stable and sustainable mortgage market. The industry now has a period in which it can consider the proposals and feedback its responses to the consultative paper before the implementation of the proposed changes which are likely to take effect during 2013.

The last few weeks have again been a rollercoaster ride on the world stock and bond markets with the occasional positive day being outweighed by the sheer number of negative ones due to the ongoing crisis gripping the Eurozone.

With the G20 recently having failed to provide the type of support that the Eurozone was seeking and having been told in no uncertain terms to put their houses in order on the domestic front before they can expect to receive any further international support, we have witnessed changes of government in Greece, closely followed by Italy and in the last 24 hours or so in Spain also.

What is interesting in the former countries is that both new Prime Ministers have been parachuted into the job with neither having being elected by the voters. What this means for the democratic process presumably only time will tell, but in the case of Greece and Italy the markets had lost patience with the former incumbents and the cost of borrowing for those nations has reached a level which is deemed unsustainable.

Further concerns have now been raised around the borrowing needs of France demonstrating how contagion spreads in markets. Borrowing costs have even risen in recent days for nations including, The Netherlands and Austria both of whom have growing economies and fairly robust debt to GDP levels relative to their more heavily indebted peers and neighbours within the Eurozone.

UK bank exposure to Greek debt is comparatively small but with what appears to be a rising threat emerging in Italy, Spain and possibly France also, the potential impact in the event of a default or write down of that debt for UK banks has serious implications.

What happens in Europe really matters for our economy as more than 50% of UK exports go to the Eurozone. If as nations they cannot pay their way in the world our export markets will dry up very quickly and the impact on our economic output and our already deteriorating unemployment rate will be significant.  The politicians be they elected or otherwise need to agree a plan of action sooner rather than later!