The number of new loans being granted to individuals by lenders for the purpose of house purchase has fallen once again through the month of June, according to the latest figures which have been released by the Bank of England.
The figures show that net lending in June for new loans had increased by £4 billion, which is nearly half the figure for March, when new loans increased by £7.5 billion. Although these figures include all types of loan, the reason for the decrease is due to a slowdown in new mortgage lending, with new secured loans reaching £3.1 billion in June as opposed to £6.3 billion in March.
Much of the reason for this slowdown is due to the lack of consumer confidence in the housing market at the present time. As house prices continue to fall and banks and building societies continue to struggle with their own liquidity issues, making new mortgage loans harder to obtain and more expensive, many individuals who may have bought property have put off the decision until the market settles down.
The total number of new mortgage loans granted in June was 36,000. However, to put this figure in perspective, the total number of loans granted for re-mortgages was 84,000, more than double that of new lending. This is mainly due to the large number of individuals whose short term mortgage deals have reached the end of their initial period and are desperately looking for an affordable alternative to their existing deal.
Due to the liquidity problems of lenders, coupled with the lack of consumer confidence in the housing market at present, it seems likely that we will continue to see further reductions in new loan numbers, at least for the rest of this year and probably into next year as well.
An alarming new report from the Yorkshire Building society has revealed that the average person in the UK today could only survive on their savings for a period of 52 days if they were unable to work.
The survey, which questioned over 2000 individuals, showed that the average level of savings was £2,474 per person, but the average monthly outgoings were £1,445. Although this was the average savings figure, over one third of those interviewed admitted that they had less than £500 put away for an emergency fund. This would leave many people dependant on being able to take out a loan or use their credit card or overdraft in the event of an emergency.
Almost all the respondents to the survey said that they had no form of income protection for their salary, or even their personal loans and mortgages and 68 per cent said that they probably wouldn’t be able to manage financially should anything happen to stop them working, with one in twenty individuals saying that they would sell their house if they found themselves in this situation (easier said than done in the current economic climate).
The survey showed that many individuals have a particularly blinkered view, whether this is by choice or by ignorance it seems that people take the view that “it won’t happen to me”. This sentiment is backed up by the fact that 19 per cent of those interviewed said that they would cope on state benefits, which equate to £75.40 per week!
Out of the ten per cent of individuals who did have income protection, this was taken out to cover the monthly repayments on their loans and mortgages only, with no cover to meet the rest of their monthly commitments.
With the majority of people having insufficient savings to cover themselves in the event of an emergency, it is important to protect themselves with some suitable type of protection plan and they should take independent financial advice to assess their requirements. It may cost a little money each month to provide this type of cover, but it is a false economy to say that they can’t afford it.
The financial news at the moment is full of doom and gloom within the mortgage and loan markets, with potential borrowers unable to secure the loan amount they require and lenders being unwilling, or unable to offer loans or mortgages to anyone who has anything less than a squeaky clean financial record a large deposit. As a result of this, the number and amount of new mortgages has fallen dramatically over the last few months.
The same cannot be said for the equity release market, which appears to be enjoying a healthy level of growth at the moment, according to Safe Home Income Plans (SHIP), the trade body for equity release providers.
The latest figures from SHIP show that the amount of funding raised through equity release loans granted during the second quarter of this year has risen to £275.7 million, as opposed to £242.7 million for the first quarter of the year, giving an overall increase of 14 per cent in just three months.
These figures highlight the fact that many individuals who have retired, or are approaching retirement are starting to feel the effects of the rising cost of living, coupled with the fact that many people’s pension plans have fallen short of their expectations, either due to poor fund performance, or a lack of previous funding and as a result are in the position of being “asset rich but penny poor”, with a large amount of equity tied up in their home, but little or no money in the bank.
The director general of SHIP, Andrea Rozario, said “These figures serve to highlight the distinctly different forces that drive the equity release market relative to the mainstream market, including the fundamental pressures on the UK’s ageing population, falling levels of pension contributions and the very high levels of personal wealth held in housing equity.”
A large number of loan and mortgage providers in the UK are still reeling from the effects of the credit crunch and are continuing to struggle with liquidity issues from a high level of arrears and defaults and the general lack of available money on the wholesale market.
Several experts suggest that these lenders, in many cases, have brought their problems on themselves due to a history of irresponsible lending over the past few years.
Vince Cable, shadow chancellor for the Liberal Democrats, has now called for those who provide any type of loan for an individual to act in a more responsible manner and for much more regulation within the loan industry. He said “If you borrow from a bank, there’s not a lot of regulatory consumer protection, there needs to be a more level playing field and lenders need to face stricter controls over their lending activity.”
Probably the best way of ensuring responsible lending is to use an affordability calculator for anyone applying for a loan or mortgage, which takes into account a persons regular expenditure as well as their monthly take home pay, rather than just credit scoring a customer and checking their income only.
An accurate affordability calculator will demonstrate that the borrower has the ability to meet the monthly repayments on their new loan or mortgage.
The Council of Mortgage Lenders have stated that many of their members already use such an affordability based system to assess a clients suitability for a mortgage loan and the British Bankers Association has also defended its members stating that most banks already have suitable procedures in place.
The Financial Services Authority (FSA) is currently in the process of carrying out a review into responsible lending and expects to publish its results in the near future, at which time we may well see additional regulation being introduced to ensure that all loan and mortgage providers conform to appropriate affordability rules.
It was only six months ago when those individuals with personal loans and mortgages were enjoying the benefits of the Bank of England cutting the base rate of interest.
Between December 2007 and April this year the base rate was cut on three occasions by a quarter of a per cent each time, from 5.75% to 5.00% and the financial news was full of reports of interest rates falling further, with the prospect of the base rate reaching as low as 4%, or possibly even lower by the end of this year, which was good news for all those people who were struggling to keep up with their mortgage and loan repayments.
How things can change in just a short space of time. Since April this year, inflation has started to rise alarmingly, mainly due to the increases in the cost of basic items such as food and fuel and now stands at a level of 3.8%, which is almost double the Governments target figure of 2%.
This has caused the Bank of England to rethink its strategy with regard to any further interest rate cuts, in the short term at least, and any hope of reduced monthly costs for those individuals with a mortgage seems to have evaporated as the Bank has stubbornly kept interest rates on hold at 5.0%.
The Bank of England’s Monetary Policy Committee (MPC) is the group responsible for deciding on a monthly basis what level the base rate of interest will be set at and most onlookers have awaited the outcome of these meetings with a certain amount of inevitability, as rates have remained constant.
However, the minutes from this months meeting have revealed that the MPC were split over their decision and although the majority voted for a hold on rates, there were also calls for a cut in order to help the housing market and those people with mortgages, as well as one vote for an increase of one quarter of a per cent to try and control inflation. We await with eager anticipation the outcome of next months meeting!