As the cost of living in the UK continues to rise at a dramatic rate and the effects of the credit crunch and general economic slow down continue to eat into household budgets, making money extremely tight for a large number of home owners and people with mortgages and other loans, it seems only natural that many individuals are looking to their finances to see where they are able to cut back on their monthly expenditure and continue to be able to make ends meet each month.
Many people in this situation see an obvious saving in switching their mortgage loan to an interest only basis rather than keeping it on a full repayment loan. A mortgage is usually an individual’s largest single monthly outgoing and it can be quite tempting to reduce the repayments by switching to an interest only loan.
On a typical mortgage of £150,000 the difference in the monthly repayments between repayment and interest only can be in the region of between £200 and £250 per month and although this may appear to be a great way to save money, it will end up costing significantly more over the long term.
Research from Moneysupermarket.com has calculated the long term cost of an interest only loan switch and has estimated that by paying interest only on your loan for a seven year period, could cost an extra £18,000 over the term of the loan, as interest will be charged on a larger sum of money for a much longer period. Once repayments have restarted on this basis, it could cost around an additional £400 per month to catch up on the loan and repay it over the original term.
Anyone who may be considering this option as a cost saving measure, should think very carefully about the long term effects of this course of action before they do it. They should look to other areas in their monthly outgoings first, such as luxury items and consider switching their mortgage loan to an interest only basis as an absolute last resort.
Despite all the doom and gloom which we have all been seeing in the news over the past few months with regard to the housing and loan markets, it would appear that first time buyers are still eager to get themselves onto the property ladder and many believe that now is the ideal time to buy, despite the pessimistic outlook from many industry experts.
A recent survey, conducted amongst a group of under thirty five year olds by Onesearch Direct, a private research company, revealed that 70 per cent of this age group are currently saving to build themselves a suitable deposit to go with a mortgage or homeowner loan, in order to be able to buy their first house.
When asked about the future of the housing market, 88 per cent of those interviewed said that they thought the housing and mortgage loan markets were likely to pick up over the course of the next twelve months and most felt that now was an ideal time to buy property.
It is good to see that potential first time buyers realise that they now require a much larger deposit to be able to buy a house, as the high loan to value mortgages have all but disappeared and are actually saving towards this goal.
The main obstacle which faces this group of would be home owners, other than the larger deposit requirements, is the lack of availability of finance through a mortgage or homeowner loan, although the recent Government financial package to help banks and other lenders finally seems to be filtering through the system, thereby creating more lending power for mortgage loan providers and along with the newly raised stamp duty level and reducing interest rates, now could be an ideal time to buy.
First time buyers are a vital part of the housing market and if we are starting to see movement in this area of house purchase, it could be just what is needed to drive the rest of the property market forward and move it into some positive territory.
Since the start of the credit crunch last year, we have seen the total number of available mortgages and homeowner loans decline steadily as lenders withdraw products from the market, due to the increased risk levels associated with certain types of loan and their own problems with liquidity issues.
The worst hit sectors of the mortgage market over the course of the year have been predominantly sub prime and bad credit loans, buy to let mortgages and high loan to value products, as these tend to be the areas which represent the highest level of risk to lenders, although many mainstream loan products have also been withdrawn, simply due to a lack of available funding.
According to the latest statistics from Moneysupermarket.com, in the last week alone the total number of available mortgage and loan products fell from 4,930 to 3,785, a total drop of 23 per cent.
As with previous product withdrawals, most of the casualties over last week were in the sub prime and bad credit loans area of the mortgage market. This shows that many loan providers are still continuing to tighten their lending criteria, which means that it is now becoming increasingly difficult for a potential borrower with anything less than a clean financial history to be able to obtain finance through a mortgage or any other type of loan.
Since April last year the total number of mortgage products offered by lenders has gone down by 86 per cent. Apart from the reduction in the number of sub prime mortgage products, a number of lenders withdrew their two and three year fixed rate loans, although this is possibly in anticipation of a further interest rate cut from the Bank of England at the beginning of November.
On a more positive note, there has been an increase in the number of available tracker rate mortgages and also in the number of lenders offering high loan to value ratios of 90 and even 95 per cent.
Following reports last week detailing a decrease in the number of house sales in the UK over the past year, it is probably not surprising to learn that the total number of mortgages and homeowner loans which have been approved have also fallen by similar figures.
According to statistics from the British Banking Association (BBA) the total number of loans fell by 56.6 per cent in September this year, compared with the same point last year.
There were a total of 23,442 new loans for house purchases approved through the course of September, whereas at the same time last year, the figure was approximately 54,000. This is a graphic indication of how the housing and loan markets have been hit during the past twelve months, not to mention the wider UK economy as a whole.
There is some more positive news however, as despite the fact that new home loans are down on the same time last year, there has been an increase in the number of mortgage loan approvals since the previous month.
New loans for house purchases increased by 8.8 per cent above the figure for August and the number of remortgages also increased from 47,260 in August to 51,523 in September. Overall there was an increase of £1.5 billion in new mortgage loans above the figure for August and hopefully this trend will continue, following the Government’s recent rescue package and the reduction in the Bank of England base rate of interest.
David Dooks of the British Banking association said “It was not surprising to see continued low levels of mortgage lending approvals in September, ahead of the Government’s banking support announcements. Compared to a year ago, the mortgage environment has changed significantly, with supply restricted as a consequence of the situation in financial markets and demand at a much reduced level.”
Although the housing and homeowner loan markets are struggling to keep their heads above water at the moment, with a decline in completed house sales in excess of 50 per cent since the same time last year, as many potential buyers wait and see how far the price of property will actually drop before they are prepared to purchase, there is some positive news on the housing front which suggests that the recent rescue plans introduced by the Government are actually starting to filter through to the market.
According to the National Association of Estate Agents (NAEA), although the number of property sales for September was still incredibly low, there were an increasing number of first time buyers taking the plunge and committing to buying their first home and applying for a mortgage or loan. The figures also revealed that the average number of sales per agent increased through the month of September to six, from five in August. This is the first time sales have shown an increase since January this year.
It is thought that the recent changes to Stamp Duty could have influenced some first time buyers who were sitting on the fence about purchasing, although it is more likely that the current relatively cheap price of housing has encouraged buyers to snap up bargains from people who need to sell and are prepared to accept an even lower offer on their property.
The Governments recent financial rescue package for banks and other loan providers should hopefully help restore some stability to the market and along with recent interest rate cuts, with the prospect of further reductions in the coming months, should make a mortgage more affordable for those who currently simply cannot afford to purchase a property in the current climate.
Chris Brown of the NAEA said “it is evident from the results that despite some positive indicators, consumers are still cautious with many adopting a wait and see attitude and are only moving if it is necessary. First time buyers however, seem to be returning and this is most likely due to the Government’s decision on stamp duty last month.”