Over the course of the past few months, there has been a steady improvement in the number of house sales and homeowner loans being approved, as potential homeowners and borrowers are cautiously re entering the market, with first time buyers making up a high proportion of the overall loan approvals.
According to a recent survey, conducted by the property development company Green Shoots, more than three quarters of individuals currently believe that now is probably the best time ever for first time buyers to get their feet onto the rungs of the housing market ladder, whilst property prices remain relatively cheap and low interest rates on homeowner loans and mortgages create the opportunity for a reasonably cheap loan.
The survey, which was carried out amongst 2,000 people, found that the biggest perceived problem for first time buyers still remained that of raising a suitable amount of deposit to meet lenders currently low loan to value criteria, closely followed by the ability to obtain the funding they required through a mortgage or homeowner loan. Due to significant falls in the average price of a house over the course of the past eighteen months, only 15 per cent thought that house prices were still too high for first time buyers to be able to afford.
John Hitchcox of Green Shoots said “Almost 50 per cent of respondents thought that first time buyers are key to the market recovery. Crucially, this research confirms that they are at last seeing value in the property market and largely believe that the biggest price falls have already occurred and the market has bottomed. The market decline over the last year and a half has given many first time buyers a good opportunity to save a deposit and lenders have released a flurry of new products aimed at this sector over the last few weeks with loan to values of up to 90 per cent. With interest rates still at their lowest level ever, now is the ideal time to get on the property ladder.”
Most people who have a homeowner loan or mortgage secured on their home will undoubtedly already be aware that the cost of their loan has fallen significantly since October last year, when the Bank of England’s Monetary Policy Committee (MPC) started to lower the base rate of interest in order to combat the effects of the credit crunch and recession and, although some borrowers have benefitted from a reduction on their secured loan repayments more than others, as an average figure, the monthly interest cost on a typical homeowner loan has fallen to almost half the figure it was prior to October last year.
For the twelve month period leading up to April this year, the average cost of running a home (taking into account loan repayments and gas and electricity bills, etc) had fallen from £8766 for the year, to £7298, an overall reduction of 17 per cent, despite an increase in the cost of gas and electricity, according to the latest statistics from the Halifax. The main reason for this fall was due to a reduction in the cost of secured loan interest repayments of 47 per cent on average, with the average interest rate falling from 5.8 per cent to just 3.62 per cent in the twelve month period leading up to April 2009.
Suren Thiru, an economist at the Halifax commented on the change in rates “With mortgage interest payments declining by almost half over the past year, the annual cost associated with owning and running a home in the UK has fallen significantly. Such a sizeable drop in the costs of running a home will help ease the pressure on household disposable income, providing some welcome relief for homeowners.”
The latest statistics from all the major housing market indices have shown that house prices have hit the bottom and are now actually starting to increase in value once again, according to research conducted by Assetz.
The figures show that prices reached their lowest point between April and May this year, but the figures for May show a significant increase in the average price of a new home, with an annualised growth rate of 17.3 per cent and although it is still early days to start getting excited about recovery and growth, it is the first time in a while since the downward trend has been reversed.
The two main hurdles left facing potential homebuyers are raising a sufficient deposit to meet lenders’ loan to value restrictions and obtaining the necessary funding to make the purchase through a suitable mortgage or homeowner loan. The majority of potential buyers are now realising that they need a much larger deposit than they did previously and many have saved adequately over the past twelve months or so to raise the necessary funds and so this is becoming less of a problem, but with banks and building societies still looking for reasons not to offer a loan rather than trying to help borrowers, obtaining a suitable loan is still a challenge for many.
Stuart Law of Assetz said “All indicators now suggest that we have passed the bottom of the house price curve. While we can’t read too much into one set of figures alone, all the major indices and the recent RICS survey are all indicating an end to falling prices and an increase in activity.
Extreme supply limitations and the recent introduction of some interesting new first time buyer mortgage products will help support market recovery and it is likely that we will see a flurry of higher loan to value rates released as soon as it is widely recognised that the market has stabilised and the risk to the banking sector of further housing equity losses has diminished.”
The recent economic down turn and credit crunch have caused huge problems for the finance industry and loan companies over the course of the past couple of years and although we are now starting to see the first small signs of recovery (albeit very slight indeed), the effects of the credit crunch and current recession are still taking their toll on financial institutions, particularly those connected with the secured loan industry.
Over the past twenty four months or so, we have seen several large name companies close their doors to new loan applications from consumers and loan brokers alike, making it more and more difficult for potential borrowers to obtain the secured loan they require.
Just when we thought that we were starting to see the light at the end of the tunnel and things were starting to pick up again, another secured loan packaging company has announced that it is to cease trading and will close down with immediate effect. Loan Options, a packaging company which sources secured loans across the market on behalf of loan brokers and financial intermediaries for their clients, made the announcement today, blaming the current state of the market and difficult economic conditions for the closure.
Loan Options have said that any ongoing applications will be transferred to V Loans, who will continue with the processing and completion of all current loan applications and there should be minimal disruption for loan brokers and their clients. Managing Director of Loan Options, Andy Moody commented on the decision, he said “The market deteriorated to the stage where we could not continue and we were put in a position where we had to cease trading. We will do everything we can to make sure our brokers are protected.”
We reported recently on the likelihood that fixed rate deals on homeowner loans would probably increase in the very near future, due to an increase in the cost of banks borrowing funds on the wholesale money markets.
This week has seen a significant shift in the type of loan being chosen by new borrowers, as the average interest rate charged on a fixed rate homeowner loan has increased by around 0.6 per cent in the space of one week. At the same time as this, the average rate on variable and tracker loan deals has actually fallen by around 0.3 per cent.
The figures have been released by homeowner loan brokers, Mortgageforce, who have seen the number of fixed rate loan applications drop from 75 per cent to just 64 per cent of their total. A spokesperson for the company said “Whilst a borrower’s choice between a fixed rate and a tracker is largely based on how they expect the bank rate to behave in the next few years, when the price difference between the two is this significant, it’s difficult to resist the cheaper one.”
As an example of this difference, a potential borrower looking for a new loan from the Nationwide building society has the option of either a fixed rate at 6.28 per cent, or a tracker rate at 5.23 per cent. For a typical homeowner loan of £150,000 this will mean a difference of £131.25 every month in interest payments between the two deals.
This is quite a dilemma for many people trying to choose the right loan. One solution to the problem is to opt for the more flexible tracker deal and then make regular monthly overpayments to the same level as the cost of the fixed rate. This has the benefit of reducing the loan balance quicker while interest rates are low, thereby saving interest, with any overpayment amounts being used to mitigate any future interest rate rises by making underpayments to the equivalent level.
