Market Comment

June 2012.

Mortgage Market Update.

Well, after a brief respite from the rain which we have now welcomed back, have things warmed up in the UK Economy and Property Market?

The UK economy shrank by 0.3% in the first three months of the year, more than previously thought, revised figures have shown. Last month's initial estimate from the Office for National Statistics (ONS) showed a contraction of 0.2%. The downward revision was due to a bigger contraction in construction output than previously estimated.

There are concerns that the UK economy will shrink again in the second quarter of the year - the governor of the Bank of the England Mervyn King has warned that the Queen's Diamond Jubilee could reduce output.

House prices experienced a "tepid bounce" in May, recording a 0.3% rise after falls in March and April, according to figures from Nationwide Building Society, following drops of 1% and 0.3% in March and April respectively.

The Society said prices were being supported by a lack of properties coming up for sale. Nationwide's chief economist, Robert Gardner, said: "Demand for homes remains subdued on the back of weak labour market conditions, but the lack of homes coming on the market is providing support for prices.

However the outlook is still for further property value drops. Howard Archer, chief UK economist at IHS Global Insight, said: “We expect house prices to fall by around 3% by the end of 2012. Furthermore, the risk that house prices could fall even more than this is currently being lifted by the increased downside risks to the UK economic outlook, particularly coming from the problems in the Eurozone centered on Greece and Spain."

The Euro is the source of much gloomy economic news and even more gloomy predictions here is a cheery prediction from Fathom Consulting. A potential break-up of the Euro could see London property prices halve as the world’s wealthy house buyers look elsewhere once more. Property prices in the capital’s most sought-after postcodes have been driven up by investors moving funds out of assets held in Euros to buy into what is seen as a “safe haven” alternative. Foreign money seeking a refuge from the wider economic turmoil accounted for 60pc of acquisitions of prime central London property between 2007 and 2011, according to a report by Fathom Consulting. It suggests that if the shared currency broke up completely, London property would initially be boosted by the continued flight towards a safe haven, the report predicts. But, once the break-up had taken place, demand for these assets as an insurance against this event would start to ebb.

“Although fears about a messy end to the euro debt crisis may account for much of the gain in prime central London (PCL) prices that has taken place over the past two years, we find that a break-up of the single currency area is also the single greatest threat to PCL, In our judgment, a collapse of the single currency area could ultimately produce a 50pc fall in the value of PCL property.” You might like to think that such a doom laden forecast will not affect you but if it were to occur the knock on effect on all house prices would be significant - none the less we at TMM feel this is not a likely occurrence.

The current UK housing market failed to have its seasonal May rally this year, with subdued supply and demand leading to flat asking prices everywhere but London. According to property website Rightmove, May’s poor performance was due to a combination of the end of the Stamp Duty holiday for first-time buyers, which finished in April, compounded by wet weather, worries about the Eurozone and increases in mortgage interest rates. Against a backdrop of economic instability, the Index revealed that twice as many people were looking to downsize than move to a bigger house. It was the first time in 10 years that Rightmove’s House Price Index did not improve in May.

U.K. mortgage approvals rose in April as record-low interest rates helped sustain some mortgage demand during the seasonal spring buying period. Lenders granted 51,823 loans to buy homes, compared with a revised 51,067 the previous month, according to the Bank of England. The April total remains at about half the monthly average in the decade to 2007 before the financial crisis struck.

“Mortgage approvals are very low compared to long-term norms,” Howard Archer, an economist at IHS Global Insight in London, said before the data were released. “Serious worries over the situation in Greece and how this could hit the U.K. economy may well lead to increased caution over buying a house and damp prices.”

Net mortgage lending increased by 1.14 billion pounds in April from March, the report showed. The Bank of England once more held its benchmark interest rate at 0.5 percent this month, when it also decided to stop expanding its stimulus program.

May was the month when more than one million borrowers faced increased mortgage costs as a number of the major lenders, including Halifax, Natwest and Royal Bank of Scotland raised the cost of their standard variable rate of interest (SVR). The Halifax raised their SVR by 0.49%, a move which affects more than 850,000 borrowers. The reasons for the increase are not a reflection of fears that base Rate is about to increase, these rises reflect the increased cost of borrowing on the wholesale market and other lenders are expected to follow suit.

The other big changes in the mortgage market revolve around one of the FSA’s major concerns, Interest-Only Mortgages. The majority of lenders have made big amendments to their interest-only criteria, in the many cases reducing the loan to value to around 50% of property value and with more stringent checks on the repayment vehicles being used to cover the redemption of a mortgage.

Two lenders have taken this a little further with both The Cooperative Bank and Platform Homeloans no longer offering Interest-Only mortgages on their residential mortgage offerings. Platform stated that the main reason was that the majority of applications were being made on a Capital and Interest Repayment basis and the cost of maintaining an Interest-Only facility with the compliance risk associated was no longer financially viable. They do, however, understand that Interest-Only is necessary on their Buy To Let mortgage range. How many other lenders will adopt such a rigid approach in the future?

So, what action should borrowers be taking presently. Well, with lenders raising their Standard Variable rates there is very little reason to remain on your lender's SVR, especially with the competitive Tracker and Fixed rates currently available. However with the extremely vigilant underwriting taking place currently now is also not the time to be dabbling with lenders that you are not familiar with. Now, more than ever, the role of an experienced mortgage broker is extremely important in being able to identify lenders that are not only offering competitive interest rates but those that will actually lend.

To discuss your mortgage and the different options available to you please call one of the Tyler Mortgage Management Account Managers.

Our advisors with an average of 20 years or more in the Mortgage Market can help guide you to the most appropriate solutions for your next mortgage and their wealth of experience should help ease the way for you to find the package that is most suitable for you.

You may have to pay an early repayment charge to your existing lender if you remortgage.

Your home may be repossessed if you do not keep up repayments on your mortgage.

A typical fee for arranging your mortgage is 1.5% of the loan amount.

For more personalised comment and for advice about your own mortgage requirements do please pick up the phone and call one of our team on 020 7930 7242 or email one of us having read our profiles on the “about TMM” pages on this site.

Simon Tyler, 8th June 2012.

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