The effects of the credit crunch have had a huge impact on the economy of the UK, leading to one of the worst recessions the country has ever experienced and although we are starting to see some early signs of recovery, particularly in the housing and home owner loan markets, Britain is still in recession according to the figures for the three months leading up to the end of September, despite the fact that many of our neighbours in Europe are now officially out of recession and beginning to see real growth in their economies once again.
In March this year, the Bank of England lowered the base rate of interest to just 0.5 per cent, the lowest in the history of the Bank and although some people are talking about an increase in interest rates next year, one expert claims that they must remain low in order for the economy to recover and for individuals with loans and other personal debt to be able to continue to manage their finances.
Charles Davis of the centre for economics and business research has said that it is essential that interest rates remain at their current low level for the foreseeable future.
Mr Davis also commented that the reason why the UK is still in recession when many other countries in the European Union are now seeing growth again, is largely due to the level of borrowing. Individuals in the UK have much higher personal debt levels on loans and credit cards than they do in Europe, which has slowed any recovery in our own economy, due to the fact that many people are focusing their attention on repaying their personal loans and other debts, rather than spending money on the high street. Low interest rates will mean cheaper loans and therefore make it easier for individuals to repay their debts.
Last year, the Chancellor of the Exchequer, in a bid to help the housing and home owner loan market and in particular, to help first time buyers get onto the property ladder, raised the threshold limit on stamp duty from £125,000 up to £175,000.
This could potentially save a person buying a new house for £175,000, up to £1,750 in stamp duty costs. With the end of this extension due to end in just over a months time, at the end of this year, there has been a last minute rush of individuals trying to complete their home owner loans and house purchase before the deadline expires.
The latest figures from moneysupermarket.com have shown that the number of house purchases below £175,000 has increased by almost ten per cent over the course of the past three months, as people take advantage of the extension. This increase in activity in loan applications is likely to be mirrored in January with a significant drop in activity, as the threshold returns to just £125,000 and many industry experts have called for the extension to be made permanent.
Hannah Mercedes-Skenfield of moneysupermarket.com said “Thousands of house buyers are trying to take advantage of the stamp duty holiday before it is due to end. It is encouraging to see an increase in home owners looking for this band of property, but the reality is that most properties are well above the £175,000 price tag. Most buyers looking at this end of the housing market are likely to be first time purchasers; when the stamp duty benchmark is pushed back to £125,000 and factoring in the huge deposit required by banks, stepping on to the housing ladder is going to be an impossible leap for many. The average house price in all regions is over £125,000, so this benchmark is exceedingly low.”
We reported recently that the Financial Services Authority (FSA) has proposed several changes to the way mortgages and other types of home owner loans will be regulated in the future, under its Mortgage Market Review, including an additional set of new regulations which will see previously unregulated secured loans and buy to let loans become fully regulated by the FSA in the same way as other home owner loans, more responsibility placed on loan brokers, intermediaries and lenders to confirm loan affordability for borrowers, as well as a complete ban of self certification loans and mortgages.
The Council of Mortgage Lenders (CML) has welcomed some areas of proposed regulation, but is unsure of the benefit of regulating other proposed areas of loans.
The CML has welcomed the news that secured loans, or second charge loans, are to be fully regulated in the same way as mortgages are currently, as many borrowers have faced repossession problems in the recent past through their second charge loans rather than their main mortgage. With regard to the regulation of buy to let loans, the CML believes this will have little benefit to the sector and could even be detrimental to professional buy to let investors. If the regulation is intended to offer protection to inexperienced property investors making bad choices, then the sale process should be regulated, not the available loan products.
Michael Coogan of the CML said “We will now study the Treasury consultation paper in detail, in parallel with the FSA’s consultation on potential changes arising from the Mortgage Market Review. 2010 is clearly going to be a year of regulatory change for mortgage lenders, but it’s important that change should have a clear rationale and a clear set of outcomes and not be implemented simply for its own sake as a reaction to past events that conduct of business regulation would not have prevented.”
The effects of the credit crunch, recession and subsequent lack of loan availability from banks and building societies has caused a dramatic increase in the number of distressed property sales coming to the market in recent months, particularly in the commercial loan sector of the property market, according to a new survey by the Royal Institute of Chartered Surveyors (RICS).
RICS not only looked at the property market in the UK, but also across the world and found a similar story across the globe, with around 80 per cent of all countries seeing an increase in commercial property loan defaults, leading to distressed property sales.
The distressed property market is where a home owner, or commercial property owner, has not been able to keep up with the loan repayment on their home owner loan or commercial loan, with the end result of them falling into arrears and eventually defaulting on the loan and the lender repossessing the property. The lender will then attempt to sell the repossessed property as quickly as possible in order to recoup its losses on the loan.
RICS found that, although the number of distressed property sales were increasing globally, banks were generally becoming more lenient in their approach to dealing with loan arrears and were not foreclosing quite as quickly on the loan as they have done in previous months.
Oliver Gilmartin of RICS said “Distressed property listings are likely to become a bigger feature of the global property landscape in the coming year as loan refinancing and improved pricing in some markets, provides a window of opportunity for banks to manage down some of their property loan exposure. Record low interest rates may have helped some corporate tenants meet income cover obligations for now and held back the rise on distressed listings. Despite unconventional monetary measures across some economies, the reluctance of banks to extend lending remains one major obstacle to a buoyant occupier recovery.”
Over the course of the past year or so, the number of borrowers looking for a remortgage on their home owner loan or mortgage has fallen significantly, as more and more people are finding that it is cheaper to keep their loan with their existing lender on their standard variable rate.
Despite the bank of England base rate of interest remaining incredibly low for the majority of this year and looking as though it will continue to stay at low levels, standard variable rate (SVR) loan rates have not dropped in the same way, in fact the margin between SVR’s and base rate has widened to an average of 4.2 per cent, compared with just 2.68 per cent twelve months ago.
The research comes from moneysupermarket.com, who claim that many people with home owner loans are becoming complacent about their existing lender’s SVR and not bothering to even look for a better deal on their loan. As a large number of lenders continue to steadily increase the margins on their standard variable rate loan deals, now could be the time for home owners to start looking for a better deal and maybe find a cheaper loan.
Hannah-Mercedes Skenfield of moneysupermarket.com said “Borrowers should be aware that lenders are free to price their SVR as they please and therefore an SVR deal may not be the best way to get the benefit from the low base rate environment. For those who have built up at least 20 per cent equity in their home, it is likely that you will be able to find a better rate on a three year fixed deal, at which point the only real drawback from fixing is the arrangement fee, which can be anything from around £1,000 to nothing at all.”