There has been a lot of criticism of banks and building societies over the course of the past few months, with regard to the seemingly excessive costs of homeowner loans and mortgages to borrowers.
Despite the fact that the Bank of England base rate of interest for loans is at an all time low, lenders seem to be applying a large margin to their loan products and many have been accused of profiteering and not passing on the savings they are making to their customers, those individuals who need and deserve them the most.
In defence of lending organisations, the British Banking Association (BBA) has published a fact sheet which explains how banks tend to fund their home owner loan products and why there is such a differential between loan rates and the base rate of interest and LIBOR (London Inter Bank Offered Rate), the rate at which banks borrow money on the wholesale market.
The fact sheet raises the following points: firstly, many banks fund their loan products through customer savings. In order to attract more people to save with them, banks are forced to offer rates in excess of base rate and these expenses must be bourn by loan customers. Secondly, wholesale borrowing rates for long term loans are much higher than LIBOR or the base rate, which are only intended for short term loans.
Since the problems with the sub prime loan market, the large investment companies who invested in mortgage loans through securitisation, have practically all withdrawn from this market. Finally, the new regulations which have been applied to banks have forced them to hold additional funds as capital, thereby reducing the amount they are able to offer as loans.
Angela Knight of the BBA said “The recession has made it harder for all economic activity to take place. Many other lenders have simply exited these difficult markets, but the UK’s high street banks continue to offer attractive rates on mortgages, as they do on savings, as competitively as they possibly can.”
There are many advantages to using the services of an independent financial adviser or a loan broker when looking for a new personal loan or home owner loan, from being advised on the best type of loan for your particular needs, to finding the most suitable cheap loan deal on the market and even having someone to help fill in the paperwork associated with a loan application.
The other main reason for using a loan broker is due to the exclusive deals offered by many lenders. The Abbey have just launched a range of home owner loan products which will only be available through an intermediary or loan broker.
The new loan products from Abbey will all feature the benefit of free legal costs and also a free valuation on the property to be bought. Abbey believe that this alone could save individuals who are purchasing a new home somewhere in the region of £1,650 in initial fees.
Clearly, this is a large advantage for first time buyers particularly, who usually need every last penny they can get their hands on when applying for their first home owner loan. The Abbey will also appoint a solicitor to carry out the free legal work, which is another advantage for many potential purchasers who do not already have their own solicitor, although most advisers and loan brokers are able to recommend a suitable solicitor to their clients.
The new loan products include a two year tracker at 3.29 per cent to 75 per cent loan to value, a 3.99 per cent two year fixed to 70 per cent loan to value and a 5.99 per cent three year fixed to 85 per cent loan to value.
Ricky Okey of the Abbey said “This is the only product of its kind to be offered in the intermediary market. As it is exclusive to brokers, it not only offers customers a massive saving in up front fees, but also offers brokers the competitive advantage they have been asking for.”
Banks and building societies have had an awful lot of bad press over the course of the past couple of years, with many people blaming their greed for the credit crunch and following economic down turn.
But a recent survey, conducted amongst people with existing homeowner loans, has revealed that borrowers are more satisfied with their loan provider now than they were twelve months ago. The survey, conducted by Which?, has shown that the average score for lenders in a satisfaction survey has increased form 58 per cent last year, to 62 per cent twelve months later.
The majority of those interviewed said that they were impressed with the way their lender managed to keep them informed of things like interest rate changes on their homeowner loan and how easy the annual statement was to understand, although they were not satisfied that generally their lender was reluctant to let them know about any new loan deals and products which may save then money on their existing loan deal.
Smaller lenders scored much higher than the larger lenders, with Abbey, Barclays, Northern Rock, RBS and the Halifax all remaining near the bottom of the table.
James Daley of Which? commented on the survey, he said “The cost of a deal is usually the top priority when it comes to choosing a mortgage provider, but getting good service matters too. It’s encouraging to see that mortgage lenders have seen an increase in customer satisfaction after a difficult year.
But the big lenders are still performing below average, despite all the public funding some have received over the last year. Make sure you shop around for your mortgage and remember to take mortgage fees into account as well as the interest rate when choosing a deal, so you don’t end up paying over the odds.”
When the Bank of England started to cut the base rate of interest on homeowner loans last year and continued to cut them to their lowest level in history earlier this year, an extremely high proportion of borrowers looking for a new homeowner loan opted for a fixed rate loan in the belief that they would be able to lock into a low rate of interest which would protect their monthly loan repayments once the base rate started to increase again.
But the latest figures from the independent mortgage loan brokers, John Charcoal, suggests that borrowers are starting to move away from fixed rate loans in favour of discounted and tracker loans.
With the Bank of England extending its programme of quantitative easing and talk of a slow economic recovery in the UK, it looks increasingly likely that interest rates on loans will remain at a very low level for another two or three years yet and this has caused many borrowers to rethink their position on fixed rate loans. Lenders are currently offering some extremely attractive discounted and tracker loan deals, whilst at the same time placing a high premium on fixed rate loans.
This variation in rates can make a huge difference to a borrower’s monthly repayments and many are making the decision to opt for a variable rate cheap loan instead of fixing their repayments.
One way to reap the benefits of both options is to take out a variable rate cheap loan and make overpayments each month to the level of the fixed rate option. By this method, a borrower is able to maintain their repayments at the same level if interest rate were to rise, but in the meantime they are benefitting from overpaying on their loan, thereby reducing the outstanding balance and shortening the remaining loan term.
The recent trend in the increase in the number of homeowner loans and mortgages being approved for house purchase has continued throughout the month of August, with yet another increase in the number of loans being approved.
Although there was a dip in new loan figures during July, this has corrected itself and the figures for August show an increase in new loans of 81 per cent above the same time last year. This news shows more positive signs for economic recovery and suggests than confidence is continuing to return to the housing and homeowner loan markets, both from lenders and consumers.
Despite an increase in the number of loans for new purchases, the figures for remortgages were still significantly lower than they were twelve months ago, with a 47 per cent decrease in remortgage loans since last August. This is largely due to the currently low standard variable rates which are being offered by lenders on existing loans, making a remortgage an unattractive proposition for many borrowers at the moment.
There has also been a continued decrease in the number of personal loan approvals over the course of the year, due to a lack of loan funding from lenders and a more cautious approach form potential borrowers.
David Dooks of the British Banking Association (BBA) said “The main high street banks’ mortgage lending has stabilised in a market where other lenders are largely inactive. Loans approved for house purchase have recovered t early 2008 levels, but low levels of consumer demand and a limited number of properties coming onto the market will continue to moderate lending. In reaction to the economic conditions, consumers appear to be building up their savings and controlling their appetite for unsecured borrowing”.