The UK mortgage market is back with a bang rather than a whimper. Competition between mortgage lenders has been heating up for some time, but now, finally, borrowers can start picking and choosing the best deals.
The number of mortgages available has topped 3,500 for the first time since the financial crisis. Financial information group Moneyfacts says there are now 25 per cent more mortgages available than a year ago, and most of these are at lower, more affordable rates with looser criteria.
Jonathan Harris of mortgage broker Anderson Harris says: “The mortgage market has definitely reopened for business, with a significant increase in the number of deals available to borrowers over the past year. It means much more choice at better rates – and this is true across the loan-to-value (LTV) curve.”
Recently, Halifax, Virgin Money, Metro Bank and Chelsea Building Society have all reduced rates or introduced new products to their mortgage ranges.
We have even seen the return of interest-only home loans with Clydesdale and Yorkshire Banks offering 0 per cent mortgages for the first three years on some deals.
This isn’t the only sign of recovery. Lenders advanced close to £17bn of mortgages in July, according to the Council of Mortgage Lenders (CML), up 30 per cent year-on-year from £13bn in July 2012. The last time we saw lending at this level was back in August 2008. Lending to first-time buyers (FTBs), who are often described as the lifeblood of the housing market, also hit its highest quarterly level since 2007.
Borrowers could be sitting pretty for another three years now that Bank of England Governor Mark Carney has confirmed that interest rates will remain at the historic low of 0.5 per cent until employment levels fall below 7 per cent. The Government has made considerable efforts to boost the housing market, above any other area of the economy. Although it didn’t do savers any favours, the Funding for Lending Scheme (FLS) – which gives lenders access to cheap funding – has triggered dramatic falls in the cost of fixed-rate mortgages.
If we look at average fixed rates today, borrowers can get a mortgage for five years at 3.84 per cent and for three years at 3.54 per cent (Moneyfacts). One year ago those rates were 4.73 per cent and 4.65 per cent respectively, while in August 2007 borrowers were paying an average of 6.6 per cent and 6.54 per cent.
Fixed-rate mortgages could fall even further if lenders have to work a bit harder to convince borrowers to lock themselves in when interest rates are unlikely to rise until 2016.
Right now, five-year fixes are looking particularly strong – if you have a 35 per cent deposit you can fix for five years with Norwich & Peterborough Building Society at 2.59 per cent with £295 fee. This rises to 4.39 per cent from the Nottingham Building Society (with £299 fee) if you have a 10 per cent deposit.
West Brom BS made waves when it launched the lowest rate ever offered on a two-year fixed-rate mortgage at just 1.48 per cent, undercutting the previous best buy from HSBC at 1.49 per cent, although both deals require a hefty, 40 per cent deposit and carry eye-watering arrangement fees (£2,494 with West Brom and £1,999 with HSBC).
A better option for many homeowners is the Chelsea BS two-year fix at 1.84 per cent, available to borrowers with a 35 per cent deposit, with a much smaller fee of £745.
“Since the launch of the FLS the mortgage market has really heated up,” says Charlotte Nelson of Moneyfacts. “Providers need to be seen as actively lending so rates have been slashed to record lows across the board and the number of products has increased, with many lenders introducing highly varied ranges.”
Help to Buy, launched back in April, has also encouraged banks and building societies to increase high LTV lending. So far, 10,000 people have applied to use the scheme to buy with a deposit of just five per cent. The second stage of Help to Buy launches in January at which point mortgage guarantees will be available so that buyers can take out a loan with only a 5 per cent deposit with the next 15 per cent underwritten by the taxpayer. This part of the initiative goes much further, being available to FTBs and existing borrowers (as long as their household income isn’t above £150,000) buying both existing and newly built homes.
The question, however, is that if these initiatives have been propping up the market, what happens when these crutches are removed? It may be too early to celebrate a sustainable recovery until we see positive figures without government support.
The fact also remains that many people are still locked out of the market. While lending numbers are looking healthier, they are still running at a fraction of what they were at the height of the housing boom and experts say we must still prepare for a long, slow recovery.
It’s all very well that rates have fallen across the board, but the best deals are still aimed at the already well-serviced 60 per cent LTV market and borrowers with smaller deposits still can’t afford to buy in many areas of the country.
Equally concerning is the threat that part two of Help to Buy sparks a dramatic rise in sales volumes and house prices rise too quickly which could ring alarm bells that we are returning to the problems that caused the housing market to get out of control in the first place.
“Supply must keep pace with the growing demand to prevent house prices being inevitably pushed up and the hope has to be that growing activity will help stimulate this. With detail on the Help to Buy guarantee scheme yet to be made clear, questions remain over how it will shape up, let alone the exit strategy,” says David Hollingworth of mortgage broker London & Country.
Property prices are already rising in many parts of the country, increasing by 3.1 per cent in the 12 months to June 2013, driven by an 8.1 per cent upward trend in London.
This may be welcomed by existing homeowners, but prices could easily race beyond aspiring homeowners who are already facing a squeeze on their incomes.
If we don’t see an increase in supply from house builders to keep prices in check we could find that this recovery is actually a bubble waiting to burst.