It now seems like a long time ago when the expression “credit crunch” was first used to describe the current state of the UK economy and since that time, just less than two years ago, it has become a household phrase. But just when we’d all got used to the fact that we could no longer get a personal loan or homeowner loan without paying high interest rates and large fees, it seems the credit crunch is now officially over, if you believe the latest news from economists.
Earlier this week, economists announced that the credit crunch was now at an end, as wholesale lending interest rates for short term loans between banks reached a record low level for dollar, sterling and euro loans. The London Inter Bank Offered Rate (LIBOR), the interest rate at which banks and building societies are able to borrow funds from the wholesale money markets, have now dropped to a low level, thereby suggesting a return to normal lending criteria for loan companies, as it is now easier and cheaper for these institutions to obtain a loan at reasonable rates, which means these savings and relaxing of criteria should be passed on to banks customers who are looking for a cheap loan.
One interest rate strategist, Peter Chatwell, of Credit Agricole said “This marks a return to normal territory and gives us hope that we can cope with anything that comes now. It indicates that the banks are well capitalised, with no more surprises.”
Maybe I’m just a little bit cynical and yes, we have seen some signs of improvement in the loan markets over the past couple of months or so, but it will be interesting to see just how long it takes for banks to return to offering loans on pre credit crunch terms, if they ever do!
Over the past couple of months, the Bank of England base rate of interest for loans and savings has reached an all time low level of 0.5 per cent and it seems quite likely that this is the lowest it will ever reach.
For those individuals with a variable or tracker rate homeowner loan or mortgage, this reduction has saved them a lot of money, in some cases, hundreds of pounds every month. But with the prospect of interest rates increasing again at some point in the not too distant future, many borrowers are now looking to fix the rate they are paying on their loan in order to keep their repayments down once rates increase.
But according to a recent survey from Moneyfacts.co.uk, banks and building societies are beginning to put the rates up on their fixed rate loan deals, in order to try and cover themselves in the event of future rate increases. Even though the average fixed rate loan has only increased by a small margin, several lenders have increased the rate on their products and it seems likely that this trend will continue with other lenders.
The deals offering the higher loan to value ratios have been hardest hit, with rate increases of up to 0.2 per cent for an 85 per cent loan to value deal, but margins have increased across the board.
Michelle Slade of Moneyfacts said “Borrowers hoping to take advantage of this period of low interest rates and lock into a long term fixed are going to be disappointed. Two year swap rates have continued their downward trend, but this is not being reflected in new mortgage rates. Lenders are in effect taking bigger margins from the more popular shorter term fixed deals. The best deals are still to be found for borrowers with a 40 per cent deposit, but even these have not been immune from the increase in rates, even though the risk of foreclosure on such loans is minimal.”
Last year saw the total number of properties being repossessed due to arrears and defaults on homeowner loans and secured loans increase dramatically, due to the effects of the credit crunch and the general economic slow down.
So far this year, we have already seen a year on year increase in repossessions of around 50 per cent above last year, but despite this bad news and continuing increasing levels of loan arrears, the Council of Mortgage Lenders (CML) have said that the situation is not as bad as they were predicting at the end of last year and the beginning of this year.
The latest figures from the CML have revealed that there were a total of 12,800 properties repossessed over the course of the first quarter of this year due to homeowner loans arrears, compared with 8,500 for the same period last year and 10,400 during the last three months of 2008. This equates to around 140 people losing their home every day, at the current rate. The level of loan arrears has also increased over the course of the year so far, with 205,300 homeowner loans in arrears of more than 2.5 per cent of the overall loan balance, compared with 182,600 at the end of last year, showing an increase of around 12 per cent in just three months.
The CML have said that banks and building societies are genuinely committed to helping those individuals who are struggling with their loan repayments and that borrowers should approach their lender at the first signs of difficulty. One suggestion for the figures being lower than predicted is that the recently introduced government schemes such as the Home Owner Mortgage Support Scheme and the Mortgage Rescue Scheme are starting to have a positive impact on arrears handling procedures and reducing the overall level of loan repossessions.
In the majority of cases, when an existing homeowner with a mortgage or homeowner loan is looking to move house, they usually shop around the market place for the best deal on a new loan, in many cases without even considering their existing lender.
Two years ago this would have been an easy exercise as there were always new loan deals coming onto the market, which were often more competitive than the borrowers existing loan. But following the credit crunch and the ongoing economic slow down, homeowner loans are now much harder to find, particularly at competitive rates compared with deals from a few years ago and this has had the effect of putting many people off the idea of moving house due to the increased cost and, in many cases lack of flexibility of the new loan.
What a lot of potential home movers often miss, is that a large percentage of homeowner loan deals have a portability option attached to them, which allows a borrower to keep their existing loan and move it to a new property, in many cases also allowing them to borrow additional amounts under the original agreement. With new homeowner loan deals still thin on the ground and rather expensive on rate loadings and initial fees at the moment, porting a previous loan on a standard variable rate or tracker rate could be the most cost effective option for someone wanting to move house.
Apart from cheaper loan rates and lack of additional fees, the lending criteria from a couple of years ago is also often much more relaxed and many of these deals will allow borrowers to take out loans of up to 90 or 95 per cent loan to value, something which is very rare these days, without paying a high premium.
In the current economic climate, lenders are reluctant to remind their customer of their portability options, but this will be included in the original loan agreement provided by the lender. If you are in any doubt as to the best option, or require help, contact an independent financial adviser (IFA) who can help you make the right decision.
Although the housing and homeowner loan markets are still extremely subdued, following the effects of the credit crunch and current recession, things do seem to be picking up slowly for those individuals looking to buy a house.
According to the latest figures from the Council of Mortgage Lenders (CML) a typical homeowner loan is now cheaper than it has been since 2004. However, the problem remains that of banks and building societies still being reluctant to offer loans to potential buyers unless they have a substantial deposit in order to meet lenders loan to value criteria.
Despite the low loan to value ratios offered by lenders, the CML say there has been an increase in the number of loans for house purchase and in particular, from first time buyers who accounted for around 40 per cent of all loans during the month of March, although figures are still significantly less than they were at the same time last year. Both income multiples and loan to values have dropped, with the average first time buyer borrowing three times their income and 75 per cent loan to value.
Bob Pannell, head of research at the CML said “Because the flow of lending is still constrained, there is a sharp dividing line in the housing and mortgage markets between those who can raise a substantial deposit and those who can’t. For those who can, the burden of debt payments is low and mortgage interest is consuming proportionately less income than for a number of years. This is good news for now. Even so, a mortgage is a long term commitment.
People borrowing now should be mindful of the years ahead when interest rates eventually rise, as they will. But for those without substantial deposits, entering the market is still both difficult and uncertain. While there are some signs of demand increasing, house prices remain weak and lending criteria inevitably remain inherently conservative as lenders necessarily seek to rebuild their capital position.”
