The mortgage market
The fallout from the US sub-prime mortgage market is still hitting the UK, with lenders’ stringent criteria showing no signs of abating, so buyers face largely unattractive deals at least until the end of the year.
The UK mortgage market has changed beyond all recognition in less than six months. What was once one of the most competitive, cut-throat markets in the world has collapsed into an underfunded mess, pushing rates up to stratospheric levels and brutally culling loan-to-values.
The root of the problem is the US sub-prime market, which caused banks and investors to lose billions of dollars and pounds. As a result the various methods of funding have ground to a halt. Securitisation, despite a token effort from HBOS, has more or less stopped and wholesale funding costs have gone through the roof.
The most obvious effect of the credit crunch is the death of subprime mortgages. In recent years, investor appetite for the higher yields that sub-prime mortgages could deliver has led to a massive expansion in sub-prime lending. This went from near-prime – typically for borrowers with one or two smaller County Court judgements or those who had defaulted on their loans – to heavy or unlimited sub-prime where the number of CCJs was overlooked. Discharged bankrupts and even previously repossessed borrowers could get mortgages. While there are still a few lenders offering near-prime mortgages, those with more seriously impaired credit histories have little or no chance of getting a mortgage.
Last year a borrower could get a two year tracker on a self-certification basis – where no proof of income is required – at 75% LTV, at a rate of around 5.75%. Now the same borrower would pay 8.49% for the same loan, even after taking into account the base-rate cuts we have had. This is a massive 2.74% per year increase in a little over a year. Previously, most sub-prime borrowers – even those who were unable to improve their credit scores – were able to remortgage at the end of their existing loans. Most will now be stuck on their lender’s standard variable rates, which for some will be too expensive and cause them to go into arrears. Loan-to-values Another area of major change has been LTVs.
Northern Rock for a long time led the field with its innovative Together product range, which allowed borrowers to borrow up to 125% of the value of the property, comprising a secured loan of up to 95% and an unsecured loan of up to 30% or £30,000.
A number of other ‘super-size’ lenders piled into the 100%-plus LTV market last year only to U-turn and withdraw them this year. Loans above 100% LTV were first to disappear; loans at 100% LTV vanished soon after. It is still possible to get a 95% LTV deal but a number of major lenders, including Intelligent Finance and Cheltenham & Gloucester, has exited this market.
Six months ago a borrower with just a 5% deposit could have had a two-year tracker at base plus 0.59% with a £595 fee. So, today they would have been paying 5.59%. If the same borrower now applied for a two-year tracker with a 5% deposit they would pay more than 8%, assuming they were lucky enough to find a lender who would help them, which is becoming more difficult by the day. The best rates now available are below 75% LTV. Typically, today a best buy two-year fixed rate at or below 75% LTV is about 5.75%, with a best buy tracker at the same LTV subject to the same rate.
Lenders are increasingly concerned about new-build property, especially flats. Oversupply of flats in certain urban areas, coupled with non-disclosed incentives and naïve borrowers buying through property clubs, has created a massive problem – many of these properties are now worth substantially less than the mortgage taken out on them, with owners struggling to let them at a rental rate high enough to pay their mortgage. Lenders have become incredibly reluctant to lend on new-build flats, especially in the form of buyto- let loans. There are only a couple of lenders left offering 85% LTV on new-build buy-to-let flats, with most having retreated down to 75% LTV. There are some who will only go to a miserly 65% LTV, which is surely unappealing to most landlords. Last year, lenders would happily offer mortgage products with 100% rental calculations but now most are back up to 125%, where they stood a few years ago. With the very gloomy quarterly inflation report suggesting that inflation will be above the 2% target for at least two years, the chance of further base rate cuts has gone out of the window.
The Bank of England’s Special Liquidity Scheme will take months before it helps boost banks’ mortgage funding, so high rates are here to stay for the foreseeable future.