Rates up, lending down. A familiar tale....

This week has seen a big rise in the cost of medium to long term fixed rate mortgages (as reported by various sites including the BBC).

Driven by a leap in the cost of interbank lending, Moneyfacts reports that the average two year fixed rate deal has risen by 0.16% and the average five year fixed deal by 0.21%.

I actually know this to be true as my existing lender has been offering me a new deal on my loan at 4.69% fixed for five years. When I spoke to them this week I was informed that the rate had risen by a staggering 0.8% to 5.49% (an additional 4% over five years). Thankfully I had "reserved" my previous product and so I am able to lock-in at the lower level.

The CML also report that mortgage lending in May fell back from April by 2%, a staggering 58% decline on last May.

Whilst surveyors and economists are united in believing that the price bottom of the housing market is here or imminent the cost and availability of borrowing remains a serious and critical issue to the recovery of the market as a whole. Figures showing a continued decline in lending and the cost of loans rising sharply are not good signs.

Green shoots....or not?

Amongst all the anecdotal evidence that green shoots are starting to reappear in the property market, continued statistics seem to suggest otherwise.

Research from the price comparison website Moneyfacts has found that there are only 102 mortgage products available to borrowers with a 10% deposit compared to over 3,100 in January 2008 - a reduction of 97%. The cost of borrowing has also risen - in January 2008 the average rate for a 90% loan was 1.2% over the Bank of England base rate whereas today it is at a staggering 5.73% over Base.

A further problem is that borrowers are also finding it extremely difficult to be agreed on these 90% deals. Lenders are only interested in A1 clients who have impeccable credit ratings and who fit a lender's criteria perfectly.

These and other factors have led to the Council of Mortgage Lenders (CML) reporting a 9% fall in mortgage lending in April and a 60% fall from the same time last year.

Whilst estate agents and surveyors believe the property market has neared stabilisation this lack of access to funds for all but the best quality and low "loan to value" borrowers will continue to hamper any quick recovery in the housing market.

All mouth and no trousers

Some more embarrasing news for the Government today with the news that their much heralded "Mortgage Rescue Scheme" has so far helped the sum total of....one household.

Setting aside £200million, the aim of the scheme was to help homeowners with payment difficulties sell part or all of their property to a registered social landlord to avoid being repossessed.

As with any number of these Government announced schemes (and this is no way aimed at this particular Government) the publicity generated the announcement of these schemes is often undermined by their actual efficacy once implemented. Whilst this scheme in principle will be helpful for those most vulnerable households, the fact that only one has actually been assisted rather makes a mockery of the whole endeavour.

I have said it before and will say it again - if the Government spent more time talking to the banks to free up money to lend to average, ordinary homeowners instead of expending time, energy and money on ideas such as the Mortgage Rescue Scheme, many millions of homeowners would find they could be helped...rather than (in this instance) just one.

Mortgage lending down again

As confirmed by this piece in todays Wall Street Journal, mortgage lending in the UK once again fell in March.

Approvals for house purchases fell by 7% from February's figure as total net lending eased to £3.5billion.

For every commentator that indicates that the "green shoots of recovery" can be seen, statistics such as these reinforce the fact that both the housing and mortgage markets continue to be in the doldrums. Whilst one or two lenders have tentatively started offering deals at 80-85% lending there is still a huge problem with undersupply of credit which is strangling any sort of recovery.

An absolutely key figure here is the statistic that approvals for remortgage loans have reduced by 58% year on year. The lifeblood of a mortgage brokers' business has always been the ability to transfer clients from lender to lender at the expiry of their current deal in order to save money and/or borrow additional funds. With thousands of borrowers allowing their loans to revert to their existing lenders' "standard variable rate" (because this represents a good deal now or because the value of their home simply won't allow them to remortgage) this huge sector of the mortgage market is all but closed. Couple this with the fact that house purchase loans fell in March and it is very easy to see why the mortgage advisory market is an extremely difficult place to work in right now.

Negative Equity. We're not all going to die.....

It is a term that is bandied about by the national press in much the same scaremongering manner as "internet paedophiles" or "carcenogenic". Negative equity has returned to the UK - a report from the CML today estimated that at least 900,000 homeowners had some degree of negative equity - but is it really as horrifying as the press make it out to be?

Negative equity is, very simply, a situation in which a borrower owes more on their mortgage than the value of their home. With the various changes in the mortgage market since the last recession of the early 1990s it was always likely to be the case that when prices started to fall, a number of borrowers would experience some form of negative equity. Rises in the numbers of high "loan to value" mortgages (to 100% and beyond) coupled with an increase in "interest only" loans have no left almost a million (according to the CML) borrowers in negative equity.

The simple fact of being in negative equity, though, really doesn't affect you as a homeowner. If you have no intention to move house then it doesn't much affect you - your repayments stay the same - other than the psychological effect of owing more than your asset (home) is worth.

If you think about it, though, there are millions of people in negative equity on something, if we define it as "the asset being worth less than the finance secured on it". Many with car finance or "hire purchase" agreements for a flatscreen television or washing machine would probably find that the outstanding finance was more than the value of the asset they had purchased. If you're not intending to sell the asset then, in time, that situation will reverse and you will owe less than the value by virtue of paying the debt faster than the asset depreciates or paying it off altogether.

Of course your home is a bigger asset than a new tumble dryer, but it also is likely to appreciate in value (unlike these other items). However, the mere fact of being in negative equity shouldn't alarm a homeowner in quite the way the press would have you believe - in time the asset value will recover and that situation will reverse. In the meantime, borrowers can use cuts in interest rates to overpay on their mortgage and therefore bring the loan back within the asset value or, alternatively, sit tight and wait for the housing market to recover. Which, of course, it will.

Long term pain, or long term gain?

As the Daily Telegraph correctly predicted last week, the Bank of England Monetary Policy committee last week voted to hold the Base rate at 0.5%.

For those of us with variable/tracker mortgages the recent cuts in rates have seen our mortgage payments plummet. Logically, therefore, it is easy to understand why a lot of the clients I am talking to at the moment about their mortgage needs seem to, at least in principle, prefer a tracker rate.

There is a problem, however, with this thinking.

A year or two ago, the discounts and tracker rates available were excellent. Lenders offering deals for two years round and about the Base rate were the norm - indeed many borrowers took products priced at a discount from the Base rate. I have a very happy client on a deal I arranged for him at 0.51% under Bank of England base rate which means for the next few months he can expect to pay nothing on a fairly sizeable mortgage.

Were those products to be available today, it would be a pretty easy sell to talk someone into a variable rate mortgage with a headline rate of between 0 and 1%. The difficulty is that the goalposts have moved, and any new variable deals are priced much higher than this.

Clients wanting a new variable rate deal today (if they are buying or remortgaging) can expect to pay somewhere in the region of 2.5-3% over the Bank of England base rate. Whilst this still means that clients will benefit from a low rate (somewhere around 3-3.5%) the problem will arise when (and it is a clear case of "when" not "if") interest rates were to rise. Considering that the Base rate has been reasonably stable at around 4-5% over recent years, those clients electing to take a tracker product now could quickly find themselves paying in the region of 7.5% on their mortgage if interest rates were to rise as quickly as they fell.

So, whilst clients instincts to look at variable deals are understandable considering an all-time low Base rate it is clearly imperative that future interest rate movements are taken into account when deciding on the best course of action. A 3% variable rate might look good in the short term, but a 5% fixed rate might very quickly look like better value in the medium to long term once the economy starts to recover and interest rates start to rise.

No value at high loan-to-value

The Guardian reports today that HSBC has become the second lender in recent days to relax its "loan to value" (LTV) limits, making its leading tracker product available to 75% rather than 60% "loan to value".

Whilst these small movements will help borrowers with 25% deposit/equity the problems for clients looking for high LTVs endure.

I have had a very good, longstanding client of mine call me today to let me know he has accepted an offer on his home. He is looking to move and needs to borrow 90% of the purchase price of his next house. The loan he needs is under two times his annual earnings.

The options available to him are, frankly, awful.

Many lenders can't agree 90% at all (including the likes of Woolwich andNationwide).

His existing lender (Halifax) are offering a fixed rate at an absolutely eyewatering 7.49% for five years. Abbey would offer 7.09% also fixed for five years, but this has a staggering £2,499 arrangement fee (almost 3% of the mortgage amount) which cannot be added to the loan. (Contrast this also to Abbey's latest five year fixed rate offering at 4.49% for borrowers with a 40% deposit.)

C&G are not much better, offering 6.29% also for five years (an on-line special).

It's not just the interest rates and fees that are punitive at high LTV borrowing - it is the range of products that are available. Historically, at 90% there would have been a full suite of products to choose from - tracker rates or fixed rates for between two and ten years. Now if you want to borrow 90% to buy a home you are basically having to commit to one of these extortionate interest rates for half a decade.

Anyone looking to borrow 90% is going to have a hard enough time as it is trying to find a lender that will help them. The problem is compounded by the fact that when you do find one, the interest rate options are so unpalatable that many people are put off bothering at all.