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Mortgage lending continues to edge higher

Mortgage approvals for purchases and remortgaging edged upwards slightly in April, according to the British Bankers Association (BBA), as banks continue to offer a range of competitive mortgage rates. The BBA expects this to continue, with first-time buyers in particular benefiting from cheaper rates via the Funding for Lending scheme in coming months.

However, many borrowers continue to overpay on their mortgages, taking advantage of record low interest rates, and pay down debt where they can. This makes sense – why leave savings languishing in accounts paying such poor rates of interest when you can reduce your borrowing instead? There is also a reluctance to take on extra borrowing because of the uncertain economic and jobs climate.

This trend also illustrates that we remain some way off a sustained recovery in the housing market as caution continues to prevail. However, mortgage brokers and estate agents report the highest level of enquiries seen since the downturn so we expect this to feed through to improved official figures in coming months.

Halfway house for the financial crisis as lenders cut rates

Although it feels as though the financial crisis has dragged on forever, the bad news is that we are not even halfway through it. So says Mervyn King, governor of the Bank of England, who has told the Treasury Select Committee that he does not expect the economy to recover until 2017.

The continuing problems in the Eurozone are behind his gloomy outlook, as Cyprus becomes the fifth Eurozone country to seek financial assistance. Spain has also had 28 of its banks downgraded by Moody’s Investors Service, including Santander, hot on the heels of the downgrades of Barclays, HSBC, RBS and Lloyds Banking Group last week. Meanwhile, official data shows that the government borrowed more than expected in May – nearly £18 billion compared with just over £15bn in May last year.

So what does this continuing turmoil mean for mortgages? If there is any good news, it is that the downgrades were expected so the money markets have already factored them in.

With Swap rates – the rate lenders pay to borrow from each other – falling significantly in the past couple of weeks, lenders should have some leeway to reduce margins. Indeed, several have reduced their fixed rates recently and we expect more to follow.

More money should also be available for mortgages via the Bank’s funding for lending scheme although it is not yet clear whether there will be a significant increase in mortgages available to those with modest deposits or whether lenders will continue to favour those with sizeable down payments. For this money to make a real difference to the mortgage market, lenders will have to do more lending to those with small-ish deposits.

Falling inflation and funding for lending set to boost mortgage market

With so many negative stories circulating regarding the economy, and in particular the Eurozone, it is encouraging to finally see a couple of positives. Today’s announcement that inflation has fallen to its lowest level for two and a half years shows that consumers have some respite from soaring prices, as well as strengthening the argument for another round of quantitative easing (QE). So far some £325bn of QE has been pumped into the economy.

The Consumer Price Index (CPI) fell to 2.8 per cent in May, down from 3 per cent in April, according to the Office for National Statistics. This is the lowest level seen since November 2009. The fall in petrol prices was behind the surprise drop.

Meanwhile, the Bank of England announced last week that it would offer £80bn to banks to encourage them to lend to individuals and small businesses, and pump a further £100bn of cheap credit into the UK economy over the next few months.

These moves should mean more money is available for mortgages – great news for anyone looking to take out a new loan or remortgage. It is not yet clear whether there will be a significant increase in funding for those with modest deposits or whether lenders will continue to favour those with sizeable down payments. For this money to make a real difference to the mortgage market, lenders will have to do more lending to those with small-ish deposits.

Swap rates – the money market rates lenders pay to borrow from each other – continue to fall, as it looks increasingly likely that interest rates won’t rise for the next few years. Indeed, a rate cut could actually be on the cards, which will again be welcomed by borrowers on variable rates.

On balance, these latest developments are encouraging for borrowers. But, as ever, it is important to seek advice before taking the plunge by speaking to an independent mortgage broker, particularly if you have complicated income streams or an unusual property.

The Greek crisis and UK mortgage funding

While there is much uncertainty as to what would happen if Greece were to leave the Eurozone, there is bound to be a knock-on effect on mortgage pricing and availability in the UK. Some lenders will be more affected than others, particularly those with close links to, or particular exposure in, Greece.

The new capital requirements under Basel III also mean some lenders have been reining back on the amount of lending they are doing. But while some have been raising their variable-rate mortgages, including a number of lenders increasing their standard variable rates, several have announced a reduction in fixed-rate mortgages.

It’s a confusing picture. Falling inflation is taking the pressure off the Bank of England to raise interest rates, while Christine Lagarde, the head of the International Monetary Fund, suggests that a further reduction may actually be necessary to stimulate the weak UK economy. Borrowers may well be asking what happens next and how they should best protect themselves.

Wealthy borrowers from Greece, Italy and France, who are looking to escape the problems or political upheaval in their own countries, are regarding London as a suitable safe haven. Increases to stamp duty announced in the Budget mean many are now buying in their own name and gearing up for tax purposes – something the private banks are keen to help with.

The good news is that there are still lenders who are lending to the right sort of client, particularly the private banks who aren’t over-exposed to the Eurozone. Borrowers with complicated income streams, who rely on bonuses and require interest only, should seek independent mortgage advice. Contact us for further details.