We are all more than aware of the slow down in the housing and homeowner loan markets over the course of the past eighteen months and also that the key to restoring some level of activity and growth in these markets is to encourage first time buyers to start entering the property market once more.
We have reported recently than the Royal Institute of Chartered Surveyors (RICS) has seen an increase in interest from first time buyers over the past couple of months, but although the interest is there, it seems that there is still a distinct lack of available funding for these individuals through suitable homeowner loans and mortgages.
Whilst the base rate of interest on homeowner loans has dropped significantly over recent months, there are still very few products available for first time buyers and many of these are fixed rate loan deals with rates of up to seven times that of the current bank base rate and even variable rate loans have a loading of around 3 per cent above base rate, according to research from Moneyfacts.co.uk.
Even if first time buyers can afford to pay these high interest rates, many simply do not have sufficient deposit monies available to top up the maximum 75 per cent loan to value ratio, which is required to get a reasonable rate on the loan.
A spokesman for Moneyfacts said “First time buyers are meant to be the lifeblood of the property market, but with the average rate as high as 7.02 per cent, there is little incentive for them to step on to the first rung of the ladder. Even if you have found a property at a bargain price, if you don’t have at least a 25 per cent deposit, you will be paying a heavy premium and for many it is not a price they are prepared to pay.”
Both Northern Rock and the royal Bank of Scotland have announced that they are to make additional funds available for new homeowner loans, hopefully a substantial portion of this money will be directed towards securing some more competitive loan products for first time buyers, with more accessible loan to value ratios.
The recent troubles faced by the majority of high street banks and building societies, with their own liquidity issues and ability to lend, has meant that when it comes to being able to offer personal loans to their customers, many individuals are now being rejected for the loan they require, even if they have a clean credit history.
At the same time, people who have invested their savings with their local bank or building society have seen the rate of return on their savings fall dramatically, as interest rates have been reduced to record low levels. As a result of this disillusionment with the traditional banking sector, many people, both borrowers and savers alike, are looking for alternative and better ways to obtain either the cheap loan they want, or a better return on their savings.
One website, Zopa, which offers personal loans and investment opportunities to individuals with a good credit history has seen its business levels increase by 150 per cent over recent months. Zopa aims to match up people who are looking for a cheap loan, with people who want a better return on their savings, thereby arranging loans on a truly personal basis.
A spokesman for Zopa said “We have a stringent vetting process, we don’t have a problem admitting that and don’t want anyone to be disappointed. As the banks continue to fail their customers despite huge bail outs from the UK taxpayer, it is not surprising that record lending is taking place between the growing number of Zopa members.
Creditworthy borrowers shunned by the banks are able to access loans at much better rates. And now that banks have all but given up trying to address their liquidity problems by attracting savers, more and more people are discovering the fabulous returns they can earn on their savings by becoming a Zopa lender.”
Since October last year, the Bank of England has lowered the base rate of interest charged on homeowner loans on several occasions, from 5 per cent in October to a record low level of just 1 per cent currently.
This has meant massive savings for many borrowers, particularly those who opted for a tracker loan. A typical homeowner with a loan of £100,000, who has benefitted from the full amount of the interest rate cuts, will have seen their monthly repayments reduce by more than £300, giving them a particularly cheap loan at the present time.
A number of banks and building societies have reported that a large number of borrowers in this position have used the recent rate cuts to their advantage by making overpayments on their secured loan. This has the effect of reducing a person’s outstanding loan balance much quicker than they would under normal circumstances and could reduce the term of their homeowner loan by a number of years and save them several thousands of pounds in interest payments.
The other advantage of this course of action is that those borrowers making overpayments now will be in a much stronger position to manage financially when interest rates eventually do increase once more, as they will not feel the extra burden of increased loan repayments and their outstanding loan balances will be significantly less than if they had not made any overpayments.
Banks and building societies are encouraging borrowers to take advantage of this opportunity wherever they possibly can do, as it is inevitable that interest rates will increase once again in the not too distant future. A spokesman for the Council of Mortgage Lenders (CML) also commented “Now is also a good opportunity for borrowers on interest only mortgages to switch to repayment mortgages to use this period of low interest rates to start to pay down their loans.”
Two years ago, in those days when it was easy to get practically any loan you wanted, before the credit crunch reared its ugly head, if someone wanted a secured loan with a loan to value of 100 per cent (or even more!) it wasn’t considered to be an unreasonable request and there were several lenders who would be quite happy to offer a secured loan on that basis.
Wind forward to the present day and it would be fair to assume you would be laughed at if you asked the bank for a 100 per cent loan, although once the secured loan market eventually returns, lenders are more likely to ease their criteria and increase loan to value ratios.
However, in an interview in the Observer at the weekend, Gordon Brown suggested that the Government could possibly ban 100 per cent loans in the future in order to protect borrowers against negative equity in their homes.
He said that it was important to get the balance right between providing a service for homeowners and a boost for the housing market and ensuring that future lending is carried out in a responsible manner.
He said “We do want to see the reinvention of the traditional savings and mortgage bank in Britain, for loans to be made on prudent and careful terms, not just to people with large deposits, but to first time buyers and those on middle and modest incomes who wish to buy their home but have not been able to save a huge deposit.”
Mr Brown also said that the Government was doing all it possibly could to encourage and help banks and building societies to start offering secured loans once more on realistic terms and that in future there was a need for better regulation of the banking sector, to help avoid the current situation repeating itself.
Following a dramatic increase last year, in the number of homeowners who were experiencing difficulty in keeping up with the repayments on their homeowner loans, due to the effects of the credit crunch, the Government announced a range of plans which would be introduced to help borrowers to avoid the problems of loan arrears and possible repossession proceedings.
The final details of the homeowners mortgage support package were announced last week, although the government are still in discussions with lenders over some of the details.
The scheme will offer financial assistance to borrowers who have suffered a temporary loss of income from their main employment, which will mean that they are unable to meet the full repayment amount of their homeowner loan.
In order to qualify for the scheme, borrowers must have been making some level of repayment on their loan, which has been agreed by their lender, for a minimum of five months.
The Housing Minister said “We are determined to do everything possible to ensure repossession is always a last resort and are taking action to give real help to households most in need. Our mortgage rescue scheme is up and running, more free legal and debt support is available than ever before and we have increased financial assistance to help people pay their mortgage if they’ve lost their job.”
The full scheme is expected to be rolled out in April this year, once the final details have been agreed, but with the Council of Mortgage Lenders (CML) announcing that there were a total of 40,000 repossessions due to loan arrears throughout the course of 2008 and with the figure for the current year expected to be much higher, help can not come soon enough for the large number of borrowers who are currently unable to maintain their homeowner loan repayments and are building up increasing levels of loan arrears.