Over 15% increase on new mortgages
Introduction
The housing market in the U.K. has shown definite signs of revival in recent months, with a steady monthly increase in the number of mortgage loans approved - to levels last seen in early 2008. The total number of mortgage loans approved rose by 15.8% in May, 2009, to reach a 13-month high at 31,162, according to the British Bankers' Association. The figure was 7% higher than that for April, 2009, and, moreover, 16% higher than that for May, 2008, thus representing an increase in the year-on-year figure for the first time since November 2006.
U.K. Property Market
The rise in the number of mortgage loans approved adds to the growing body of evidence that buyers are returning to the property market, with property prices in the U.K. expected to "bottom out" by the end of 2009, sooner than in other European countries. The latest report from the Royal Institute of Chartered Surveyors (RICS), for example, suggests that confidence in the property market rose to levels last seen in 2007, in the May of 2009, while the house price to earnings ratio, which measures the affordability of housing, fell to 4.36, from a peak of 5.84 in the July of 2007, a level last seen in the January of 2003. Cumulative cuts in the Bank Rate, by the Bank of England, from 5.0% in the September of 2008, to 0.5% in the March of 2009, and thereafter have also boosted the affordability of housing. Typically, the proportion of disposable income devoted to mortgage payments by new borrowers across the country fell from 48% in the first quarter of 2007 to 31% in the first quarter of 2009. This is well below the average of 37% recorded over the last 25 years.
Despite signs of stabilisation in the housing market, gross and net mortgage lending remains at historically low levels, and there are fears that ongoing problems in the mortgage market – the lack of mortgage finance available to first-time buyers, for example – may hinder any recovery. Net mortgage lending – that is, gross lending minus repayments and redemptions – fell for third month in a row in the May of 2009, to £2.3 billion. This level of lending was last seen in early 2001, when the average mortgage loan was over £59,000 lower.
Data from the Bank of England also suggests that over 23% of mortgage applications in May were turned down. This actually represents an improvement on the January low, when 33% of mortgage applications were turned down, but serves to highlight the difficulties being experienced by would-be buyers. Mortgages are becoming easier to come by in many cases – in fact, some house builders are so determined to find buyers for their properties that they are offering 100% mortgages, the type that caused the housing bubble in the first place – but lenders are still reticent to offer their best rates to anyone with a less-than-perfect credit rating. Even with the Bank Rate settled at 0.5%, and the Bank of England continuing its £125 billion Asset Purchase Facility, to improve liquidity in credit markets, the cheapest mortgage deal available has an interest rate just under 3% and, even then, is subject to an excellent credit rating and, often, an LTV ("Loan To Value") of 60%, or less. In other words, many borrowers – including those who are unable to raise a deposit of 40% – will pay more.
To put things in perspective, the number of mortgage products available to borrowers with a deposit of 10% has fallen 97% from 3,148 at the beginning of 2007, to just 102 in the June of 2009. To add insult to injury, the average interest rate charged on 90% LTV mortgage loans has risen slightly, from 6.20% to 6.23%, in the same period, despite the Bank Rate having plummeted from 5% to a record low 0.5%. Major mortgage lenders, such as Abbey, Halifax, Lloyds Banking Group and Nationwide, have sought to take advantage of the upturn in the number of mortgage loan applications by increasing the cost of their fixed rate mortgage products. Abbey, for example, has recently announced that it is raising interest rates by between 0.25% and 0.5%, following steep increases in wholesale funding costs, while Lloyds has also raised to rate of fixed rate mortgages taken out through intermediaries by 0.7%. In partial mitigation, however, Nationwide has also announced that it is expanding its range of mortgages for customers with just a 5% deposit to two, and offering three year tracker deals for existing customers, either those whose existing deal is coming to an end, or those who already on its base rate.