Over the course of the past few months there has been much rejoicing by all those individuals who have a homeowner loan on their property, particularly those who took out a tracker rate, as interest rates have dropped significantly since October last year, to the lowest levels in the history of the Bank of England, saving many borrowers hundreds of pounds each month on their homeowner loan repayments.
And despite the fact that rates have already reduced by 3.5 per cent, there is still a large amount of speculation and expectation from experts that interest rates are likely to fall even further over the coming months.
Many borrowers are now enjoying the fact that they have an increased level of disposable income each month, due to their reduced loan repayments, but there is a word of warning to be noted before all these individuals get carried away with their apparently new found wealth.
Although interest rates have dropped to an all time low level, with the possibility of even more reductions, this will not last forever and there is no doubt that interest rates will increase again at some point in the future.
Those people who are now saving money on their homeowner loans should be careful not to use those monthly savings to take out any new personal loans or other credit commitments, as they won’t have the money to be able to afford these repayments once their mortgage or homeowner loan payments go back to where they were previously.
A far more sensible idea is to focus on repaying any existing outstanding personal loans or credit card balances with the spare cash, or overpay on their mortgage if they don’t have any other debts. This will leave borrowers in a much stronger financial position to be able to cope when interest rates do eventually go up again.
Over the course of the past few months, there have been several reports on the Competition Commission’s (CC) investigation into the sales practices of companies who offer Payment Protection Insurance (PPI) at the same time as arranging a personal loan, or other credit agreement, following a large number of complaints from customers and claims that borrowers are not given the option of choosing their own policy to protect their loan from the whole of the marketplace, thereby limiting choice for consumers.
Yesterday, the CC published the final version of its PPI report, which stated that there was not enough competition between PPI providers, as people tended to take out the plan offered by the company arranging the personal loan or credit card at the same time as the loan application.
The changes to be introduced following the reports findings are as follows: a ban on sale of PPI at the same time as a loan or credit agreement and a waiting period of 7 days before the customer can be approached for such a policy, a complete ban on single premium PPI, as this stops a customer being able to change providers at a later date, personal illustrations and annual statements are to be introduced in order to provide more information for customers to be able to compare products.
Although this move will certainly improve competition between PPI providers, it is feared that a large number of people who apply for a personal loan or credit card, will simply miss out on this cover, as once they have the loan in place people tend to lose interest in things such as protection policies, which cost them extra money.
As was reported in the financial press yesterday, with PPI claims for unemployment increasing by more than double since twelve months ago, this really isn’t the best time for borrowers to be missing out on this valuable cover, for whatever reason!
Over the course of the last eighteen months or so, the average price of a property in the UK has continued to fall steadily as the economy slows down and banks and building societies are still extremely reluctant to grant secured loans to potential borrowers.
Official figures show that house prices have now fallen for 16 consecutive months and that during this time, average prices have reduced by more than 10 per cent across the country, in some areas this drop has been even larger.
With prices falling by another 1 per cent in January this year, many borrowers with secured loans are now starting to worry about the prospect of negative equity on their home. This is where the outstanding balance on their loan exceeds the value of the property itself.
New research has shown that around 25 per cent of homeowners are now bothered about negative equity and of these, 11 per cent bought their home when prices were at their peak and therefore have not enjoyed any growth on the property prior to the falls.
Another 8 per cent have taken out an interest only secured loan on a high loan to value ratio and these are the borrowers most likely to suffer, as they are not reducing their loan balance.
Of those people interviewed for the survey, around 29 per cent said that they bought their home before house prices increased as dramatically as they did and therefore still had plenty of equity in their home, despite recent drops and 16 per cent of homeowners expect the housing market to settle down over the course of this year.
Just over a quarter of people said that they are not realistically bothered about house prices, just that they are still able to keep up with the repayments on their secured loan and in the present economic situation, this would seem to be a sensible approach.
Traditionally, when someone takes out a new homeowner loan or mortgage, they look at the short term cost of the loan, over two or three years for example, whilst the initial incentive remains on the product, whether that is a fixed rate, discount or tracker rate.
Once the initial period has finished, most borrowers will re mortgage their home to get another cheap loan deal from a new lender for another two or three years…and so it continues throughout the term of the homeowner loan.
Although this may not be the most cost effective method of buying a house over the long term, by the time the borrower has paid for legal fees and valuation and arrangement fees on the new loan, many people feel as though they are getting a good deal and so the process will carry on.
But things now seem to be changing on the homeowner loan market. As lenders are withdrawing any competitive cheap loan deals from their books and interest rates on borrowers existing homeowner loans have fallen significantly, many people are choosing to remain on their existing lenders standard variable rate of interest once their initial deal has ended, rather than looking for a re mortgage product, as in many cases this is much cheaper than any of the new loan products on offer from other lenders.
If a borrower only has a low level of equity in their home, the case is even stronger for staying with their original lender, as most of the competitive loan products on the market at the moment will only lend up to 65, or 75 per cent loan to value.
Until banks and building societies start to offer more competitive homeowner loan deals, we are likely to see the re mortgage market in the UK stagnate, as there is no incentive for a borrower to switch to a product which will work out more expensive for them.
Just in case anybody out there was unaware of this news, the UK is now officially in recession.
Most people already knew that this was the case of course, but the latest figures for growth last year have confirmed that Gross Domestic Product (GDP) was in the red by 1.5 per cent for the last three months of last year, following a decline of 0.6 per cent in the previous three months.
This last decline in GDP is the largest single quarter drop since the middle of 1980 and is much greater than was expected by experts, who had predicted a fall of 1.2 per cent.
The definition of a recession is two consecutive quarters of negative growth, and now that this has happened, what we already knew has now been made official.
Although opinions are divided on how long the recession will last, many experts are optimistic that recent Government plans to assist the banking sector will have a positive impact, allowing banks and building societies to be able to offer loans to businesses as well as returning to offering homeowner loans to potential buyers, giving a boost to the housing market and therefore the rest of the economy as a whole.
John Cridland of the Confederation of British Industry (CBI) said “The intensity and speed of falling demand combined with the global credit crunch mean this recession is going to be more painful than the early nineties and sadly one consequence of this will be higher unemployment.
Looking ahead, we hope the impact of interest rate cuts, falling inflation, the fiscal stimulus and the Government’s recent measures to kick start lending will have a stabilising effect later this year.”