Mortgage Advice Center

So what exactly has been happening Well we have had the credit crunch which has resulted in mortgage lenders not being able to lend money as freely as they have in the past. Why haven’t they been able to lend money?

1. They have not been able to borrow the money themselves at competitive rates to lend to the consumer.
2. Their lending criteria has become stricter to ensure that any mortgages that they do give out are likely to be repaid.
3. People with poor credit and high loan to values have found it harder to re mortgage because of this.
4. Because money to lend is costing more and criteria are becoming stricter, smaller lenders are going out of business or withdrawing their mortgage products from the market
5. The main banks are dominating the market and supposedly can’t keep up with the volume of sales and are therefore dual pricing. This means they are offering more competitive products direct to consumers than going through an intermediary. The reason for this was because now there are less lenders on the market they have increased volumes of business so they did not need the volumes of business that brokers provided. I am not sure if I believe this excuse from one of the main banks though.

The problems with this dual pricing issue have been that ;

1.The consumers are not getting advice, they are talking to sales staff of the banks, not advisor’s and often have to wait a week or so to be contacted by them. It hard to talk to somebody about your mortgage with a bank.

2. From the responses that I have heard banks have been cherry picking deals and a lot of applications are not been processed or are taking a long time to be processed.

3. Consumers are being sold to from internet mortgage sourcing sites where the consumer has to make their own decision about the mortgage without seeking professional advice.

4. Brokers had direct access to underwriters and could talk through cases with the lenders, push and chase cases through. We could harass solicitors to make sure mortgage were completed on time. This service is lost when talking to sales staff for a bank.

However things are starting to turn, dual pricing is now reducing. Mortgage brokers are starting to get better deals. In my opinion we have got through the worst times in the mortgage market. Rates are starting to decrease and dual pricing is reducing ensuring that the consumer is getting the right advice about their mortgage through a broker and getting the best deal.

With falling house prices and a temporary collapse in house building, it may seem strange to be talking about a housing shortage. However, if we put aside the short term difficulties of the credit crunch and falling demand, there is an underlying problem that in the long term housing supply is forecast to fall well short of housing demand. For example, the government have stated that the UK requires an annual rate of 240,000 houses a year if we are to meet demand. However, the current rate is only 125,000. Even during the housing boom it was not possible to meet demand.

Reasons for Housing Shortage

Rising Demand

Firstly, the population of the UK (unlike many other western countries) is rising. This is partly driven by immigration and higher birth rates.

Furthermore, the number of households is rising faster than the population. For example, there is an increase in the number of one person households. This is due to factors such as divorce rates, ageing population and people leaving home earlier.

There is also rising demand for second homes and demand from abroad. The demand from foreigners is particularly noticeable in parts of London. Russian oligarchs take advantage of UK tax law to live in the UK and avoid paying tax. (It is rather perverse that locals are being forced out of their own housing market, so that Russian oligarchs can avoid paying tax. But, this isn’t just an ‘urban legend’ there is a lot of truth in it.

Restrictions on Supply

Not In My Back Yard.

The truth is that most people agree it would be good to build new houses. But, we would just prefer them not to be built anywhere near we live. I am as guilty as anyone. There is a proposal for a new eco town just outside Oxford, at Weston on the Green. I am opposed to it because it would mean losing a cycle track at an airfield. As an economist I agree more  houses should be built, but on a personal level I don’t want the houses built here.

Protect House prices

An obvious motive for opposing homebuilding is that it increases the value of existing home prices. If 10,000 new houses are built in our town, it can only lead to lower prices. If we stop new houses being built, it increases the value of existing houses. Therefore, the majority of the population (homeowners) have a vested interest in preventing new homes being built. Some young, first time buyers, will be keen for new houses to be built, but, they are in a minority and so don’t have much influence in the local democratic situation

Environment

Britain has beautiful countryside, there is rightly an instinct to protect it. If we build homes everywhere and cover the south east in concrete, we will lose something special. This is a powerful motive against the building of new houses.

What does this Housing Shortage Mean?

Many in the UK, with good reason, would like to see lower house prices so that first time buyers can get on the property ladder. However, if demand rises faster than supply, then in the long run house prices will continue to be much higher than incomes.
Inequality. The current situation has benefited existing homeowners who have seen an increase in their wealth. First time buyers, will face tremendous costs to get on the property ladder.

Long Term forecast for Housing Prices

What Causes house prices to rise and fall?

This is a question I sometimes ask my economics students. - If you were the Bank of England governor what would you do?

To be fair, the MPC have quite a few difficult choice to make. The decade of low inflationary continuous growth seem to be over. The current economic situation includes the unwelcome development of both higher inflation and lower economic growth. This deterioration in economic prospects comes against a backdrop of falling house prices, a shortage of credit in the banking system and record levels of personal and government debt.

In one regard, the MPC have a simple target - keep inflation between 1-3%. However, although the government only set an inflation target, it is assumed they will be sensitive to other issues such as economic growth and unemployment.

Recently, the Bank forecast that inflation will rise to 4% by the end of the year. This is not unreasonable given rising food and energy prices. In normal times this would require higher interest rates to reduce the inflationary pressure. However, these are not normal times.

This inflation is caused by rising costs and not rising demand. The rising costs are squeezing living standards and consumer spending. Furthermore, falling house prices are discouraging consumer spending. With this ‘double whammy’ of rising living costs and falling house prices, the last thing the MPC should do is to be increasing rates. Higher rates at this stage of the economic cycle could tip the economy from sluggish growth into a full blown recession.

The problem is interest rates cannot solve both problems of lower growth and higher inflation at the same time. It may be they just to live with a worse trade off.

Reasons to Avoid Increasing interest rates.

True, inflation is rising, but, even 4% is much lower than past inflation problems such as 27% in 1979, 10% in 1990.

Much of this inflation is hopefully short term. If oil prices stabilise, if the government doesn’t have above inflation tax rises, then next year, we should expect the inflation to fall in 2009.

The slowdown in the economy is going to be quite marked and will help to reduce inflationary pressure.

Why the MPC is talking of Increasing interest Rates

They are worried the current inflation may lead to a permanent rise in inflation and inflation expectations. For example, they are worried at the prospect of a wage inflation spiral following from generous wage increases such as the shell drivers.

Personally, I think the prospect of a recession is far more damaging than an inflation rate of 4%. The MPC need to show some flexibility, to stick to rigidly to an inflation target of 2% in the current situation, would be to chase the wrong target.

2008 has seen some of the biggest changes to Buy to Let mortgage criteria since they were introduced in 1994. The ‘credit crunch’ has meant that lenders are more selective about whom they will lend to and the type of propositions they will lend on.  If you haven’t been actively looking at funding for your portfolio recently, some of the changes may come as a bit of a surprise and changes are still occurring now on a daily basis.

Here’s what you should know…

Availability of mortgage products
The number of Buy to Let products available has fallen 60% since the onset of the credit crunch. An increasing number of investors are asking for funding for certain property or tenant types, rather than asking simply for the best rates.

New build property
New build property (which come lenders may also classify as properties, flats or houses built or converted in the last twelve months) has been a particular cause of anxiety for Buy to Let lenders. It is increasingly common for lenders to refuse to lend on this type of property altogether.
New builds is the one are of concern in the sector, particularly in come city centres where supply is outstripping demand and the fact that twelve months are classed as new build may come as a surprise to many investors. It is still possible to fund new build Buy to Let property but funding options are extremely limited.

Loan to values

Some lenders are asking investors to put down larger deposits by lowering the maximum loan to value they will lend at. In the last five years, Buy to Let lenders have lent at 85% loan to value, with many lending up to 90% loan to value last year. However, some lenders are now introducing a maximum loan to value of 75% to 80%. The move is fairly widespread across the marketplace with some lenders making definite moves to increase deposit requirements.

First time Buy to Let investors

First time Buy to Let buyers are also likely to find their mortgage options decreasing. Some mortgage lenders are no longer lending to first time landlords but it remains to be seen if this will become the market ‘norm’.
Products available for a shorter time
Lenders are increasingly withdrawing products with little or no warning due to concern about lending beyond their available funds. Competitive products have a very short shelf life in the current market and we would urge investors to act fast to secure funding otherwise you’ll be disappointed.
The changes in the  Buy to Let mortgage criteria cannot solely be attributed to lender worries about the credit crunch and the need to ensure loans are as prime as possible. The credit crunch has meant fewer organisations are lending because securitised lenders are having difficulties securing funds at a rate competitive enough to re-enter the market.
As a result, the lenders remaining are receiving a much higher number of applications and as a result have been lending in elevated volumes. Such actions may be partly being used as short term mechanisms to lessen the volume of applications lenders are receiving, allowing them to achieve smaller lending volumes they find comfortable. However many of the criteria are likely to remain and current mortgage criteria are generally now aligned to the product offering we were seeing 5 years ago. The overriding considerations for Buy to Let lenders in the remainder of 2008 will be ‘quality’ and ‘low risk’ applications.

Article Author

Article by Johnathon from Mortgage for Business who offer a range of Buy To Let mortgages for landlords

The Market for Flats in the UK.

In 2003, Leeds city centre had 1,800 apartment flats. By 2007, that figure (planned or built) had risen to 21,000. It was a remarkable expansion in flat numbers Yet, now the housebuilders are left with a high % of flats either empty or being let to students at a discount rate. It is symptomatic of a housing boom that has turned to bust.

Why were so Many Flats built when British people much prefer to live in ordinary houses?

In a period of rising property prices (upto 25%) a year, it didn’t really matter how bad or inefficient your investment was. Even the worst investment decisions were making profit. With prices rising at that rate. building more property, of any sort, was a no brainer.

Investor Market. Alot of these flats were targeted at investors (buy to let) rather than occupiers. Therefore the market for flats was always more volatile than ordinary housing. Now that property prices are falling, investors have much less incentive to buy flats to rent.

Government encouragement. Government have tried to encourage the building of ‘affordable’ ‘environmentally friendly’ housing. In this regard, city centre flats have the potential; in particular they have the advantage of not taking up green belt land, which can be so divisive. However, the problem is that homeowners have not shared the government’s enthusiasm for buying city centre flats.

Why are Prices for flats falling More Sharply than Ordinary housing

High levels of vacancy. 25% of city centre flats are unoccupied, but even more are temporarily occupied by short term renters. It appears that supply of city centre apartments and flats is greater than the demand.

Credit crunch. The shortage of available mortgages are hitting demand for flats, just like the rest of the housing market.

Deposits. In the boom period, some homebuilders used ‘tricky’ tactics to sell houses. They would add a mark up to house prices and then sell them at a discount to buyers. This gave a misleading impression that the buyer had given a deposit. With the problems of the subprime market banks are now requiring deposits of upto 40% which unexpectedly is deterring buyers.

Effects of Falling Prices

Homebuilders have cut back sharply on new building. For example, Persimmon has completely halted beginning new developments. This downturn in the construction industry will cause further economic problems and rising unemployment.

Any Good News?

The only bright note for investors in flats is that generally rentable incomes are holding up well as people rent rather than buy in the current climate.

Also, in the long term, the current number of new houses being built is insufficient to meet rising demand from a growing population; whilst house builders may face short term difficulties, occupancy rates will probably increase over time.

People may prefer to live in a semi detached with large back garden; but, it may be that people will just have to change their preferences. If the population increases as expected; it may be that high density city centre flats provide a realistic solution to the long term housing shortage.

See also:

• Why House Prices are falling
• Housebuilders | Home Truths at Economist.com

According to the government’s official statistics, inflation is currently 3%. But,many people in the UK, would probably say that they feel prices are rising much faster than this official figure. Is the government method wrong? Are people right to be sceptical of official figures. What is the real Rate of Inflation?

CPI (Consumer Price Index).

Firstly the CPI rate excludes many factors. CPI excludes mortgage interest payments (so the recent rise in mortgage costs are excluded). CPI also excludes council tax rises (which are once again above inflation.

The old method of inflation is the Retail Price index RPI. This does include housing costs and council tax. The current RPI gives a higher inflation rate (4.3%) and has done for a long time. It is argued, with good reason that CPI underestimates inflation.

RPI and CPI Inflation

source: ONS

Input prices

Input Price Inflation is rising at 15%. Materials and fuel inflation is approaching 30%. Input prices are often a lead indicator. i.e. because input costs are rising now, we can expect higher inflation in the future. ONS

Some Goods Are Rising Much Faster than inflation

Petrol prices are rising very rapidly. Nearly 30% increase in the past few months. This takes a big part of people’s spending and is a very visible figure. If you drive anywhere, you can’t help but notice the rise in petrol. Therefore, there is a constant reminder of this important barometer of prices.

Food prices

Some food prices are rising at an inflation rate of 20%

Mortgage costs rising.

Banks are increasing their own commercial mortgage rates. Meaning people with mortgages are facing much higher living costs. According to the Times, mortgage costs have risen £1300 in the past 6 months [link]

Some goods are falling or rising slower than inflation.

CPI attempts to measure the average basket of goods. Some goods are rising by 20%, but, other goods are still falling in price. For example, mobile phones, and electronic goods. These do not receive the same headline news as rising oil prices. As a general rule, the media focus on the bad news

(`Record rise in oil prices` - makes front page new)

(”electronic goods from China still falling in real terms” - is never going to make front page news.

Therefore, we tend to give more weighting in our mind to rising prices. We feel bad about price rises, but, tend to give less importance to the prices that are falling.

People’s inflation rates are different.

This is another big problem with CPI. If you have a variable mortage, pay council tax, spend alot on food and petrol, your personal inflation rate is likely to be much higher than the official figure. If you don’t spend on these goods, e.g. buy CDs and ipods, then your personal inflation rate could be lower than the national average. Some people are becoming worse off, some are becoming better off. There is a big divergence in price rises amongst different groups of goods. Different groups of people will have different rates of inflation.

What do you think? Do you feel prices are rising by more than 3% per year?

The rates on Fixed rate mortgages in the UK are continuing to increase. The average fixed rate deal is now 6.75% on 2 year mortgages. Fixed rate mortgages have now reached a 10 year high. Furthermore, continuing problems in the credit markets means that fixed rate mortgage rates are likely to rise even further. Mortgages, and especially fixed rate mortgages are determined by the interbank lending rates.

• These are sometimes known as ‘Swap Rates‘. The libor 3 month rate is also a leading indicator of interbank lending.

Because credit is in short supply with banks unwilling or unable to lend to each other, it is pushing up the cost of mortgages. Therefore, commercial banks are increasing their margin between the Bank of England base rate and their commercial rate.

For example, Nationwide, one of the biggest mortgage lenders has recently announced a 0.5% increase in interest rates, despite base rates remaining the same.

One of the lowest fixed rate mortgage rates is currently offered by Skipton Building society; its rate is still below 6% at 5.75%. However, with a set up fee of just under £1,000, the rate is effectively 6%. (link to Skipton Fixed rates)

Many other lenders are also increasing their charges to maintain profitability.

The rate on fixed rate mortgages is also complicated by recent suggestions that the Bank of England may actually be considering increasing interest rates to combat inflationary pressures.

The increase in fixed rate mortgages means many people having to remortgage in the coming months will see a sharp rise in mortgage repayments; it is this that could threaten future default rates.

Struggling borrowers have been dealt another blow as giants Nationwide and Woolwich raise rates and the cost of two-year fixed rate mortgages hits a ten-year high