The cost of taking out a new homeowner loan appears to be getting cheaper on a month by month basis, as banks and building societies increase their levels of competition on the loan deals they are currently offering to individuals. The news comes from the mortgage and home owner loan intermediaries network, Countrywide, who say that they have seen the average interest rate of their most popular loan products fall by 0.48 per cent in the space of a single month, to reach just 4.29 per cent by the end of December last year.
Although fixed rate loan deals are still the most popular type of loan taken out by borrowers, tracker rate loans are growing rapidly in popularity, from just 3 per cent of the overall loan market in May 2009, up to 47 per cent by the end of last year and increasing by 10 per cent in December alone.
Apart from loan rates becoming cheaper, lenders also seem to be relaxing their lending criteria slightly with regard to loan to value ratios. Out of Countrywide’s top ten loan deals, two of these products offer borrowers up to 90 per cent loan to value. As a result of these cheaper rates and relaxed criteria, Countrywide say that they have seen the number of loan applications increase by 27 per cent in the last three months of 2009.
Grenville Turner of Countrywide said “2009 was undoubtedly a difficult year for the mortgage market but by the second half of the year, we saw a return of confidence from both consumers and lenders, with increased applications and the re-introduction of competitively priced tracker products. This confidence has caused a dramatic shift in the type of business written, with near equal split between the percentage of fixed and tracker products applied for. While lenders are becoming more competitive with their products, it’s important to note that many first time buyers are still struggling to raise the necessary deposits to achieve the best rates, which will continue to impact the market.”
Over the course of the past twelve months, banks and building societies have been under pressure from the Government to increase the number of loans they offer. This is particularly the case when it comes to offering business loans to smaller companies, in order to help them survive the recession and have available funds for their future plans.
However, new figures from the British Banking Association (BBA), have shown that there has actually been a drop in the number and amount of new business loan being offered prior to the end of last year. There was a total of £573 million worth of new business loans issued during the month of November, compared with £592 million during the previous month. Those banks which have been partly nationalised and bailed out by loans from the Government are under particular pressure to support small businesses by offering new loans on a competitive and affordable level.
David Dooks of the BBA commented that the lower loan figures are due to companies choosing not to borrow, rather than banks not lending. He said “Recent Bank of England surveys have suggested that while the availability of finance for business has been improving, loan application volumes are subdued.
BBA figures show small business demand for new loans is running below corresponding levels of a year earlier and appears to have stabilised at just under £600 million a month. This lower volume of lending is not surprising, as small businesses, under pressure from difficult trading conditions, are repaying borrowing and postponing their investment intentions. Despite this economic backdrop, structured lending to small businesses continues to rise and is 4 per cent higher than a year earlier, while more than 2,000 small businesses are establishing a new banking relationship every working day.”
One of the major factors which has hit the home owner loan and mortgage market, following the effects of the credit crunch and banking crisis, has been the dramatic reduction in the amount of loan to value which lenders have been prepared to offer on new loans.
Whereas in the past it would have been relatively easy to obtain a cheap loan which offered up to 95 per cent loan to value, or even more, in recent months the average appears to have fallen to around 75 per cent loan to value, or in some cases less, due to banks and building societies dramatically tightening their lending criteria.
But according to the latest housing market survey, conducted by the Royal Institute of Chartered Surveyors (RICS), banks and building societies are beginning to ease their loan to value criteria, slowly increasing the percentage they are prepared to offer as a maximum loan to value. According to RICS, this is due to the increasing number of people looking to buy houses outstripping the number of properties which are available for sale on the market. This is having the effect of pushing house prices upwards and therefore lowering the amount of risk for the lender, thereby allowing them to offer a higher loan to value.
Simon Rubinsohn of RICS said “The market is already beginning to push up the cost of money to households, albeit very modestly at this stage. For the time being, this will not act as a material deterrent to prospective purchasers in the housing market. Indeed, the signs that lenders are now willing to be a little more generous in terms of loan to value ratios may be more pertinent in terms of converting buyer interest into actual property transactions.”
Following the credit crunch and the banking crisis, when the total number of available home owner loan products and mortgages had fallen to practically nothing, over the course of recent months there has been a consistent and sustained increase in the number of loan products that are available on the market. According to new research from the home owner loan sourcing system, Mortgage Brain, the total number of loan products has now increased for a consecutive six months and is now showing a 6 per cent increase since December last year alone.
Mortgage Brain has recorded a total of 3,534 different home owner loan products currently on the market, an increase of 47 per cent over the course of the past six months.
The largest increase has been in the tracker rate loan area, with an increase in products of 38 per cent since December last year, now with a total of 1,300 different products to choose from, but although fixed rate loan products only increased by 5 per cent, they are still the most popular type of loan product from lenders, with over 2,150 different fixed loan deals available across the home owner loan market. Even variable rate loan deals have seen an increase of around three per cent since December.
Mark Lofthouse of Mortgage Brain said “Mortgage product numbers are at their highest level for 11 months and the consistent increase over the last six months is very encouraging and could represent a more solid indication of market stability and improvement. Overall product availability has increased yet again, trackers are up again, fixed rate products are up again and after three consecutive drops, variable rate products are back on their way up.”
Yesterday (Thursday 7th January), being the first Thursday of the month, saw the first meeting of the Bank of England’s Monetary Policy Committee (MPC) for the new year. As is now seemingly becoming the norm, it was agreed at this meeting to keep the base rate of interest for loans and savings unchanged, at the current level of 0.5 per cent. The base rate of interest has now been held at this historically low level since it was lowered to this rate in April last year and we have now gone for ten consecutive months with no alteration in the base rate.
This means, of course, that those individuals with a home owner loan or personal loan will not be affected in any way by the announcement and their monthly loan repayments will stay the same, although, due to increased availability of funding in the wholesale money markets, banks and building societies are slowly starting to lower their rates on new loans and also increase their maximum loan to value ratio they are prepared to offer, making the prospect of taking out a new home owner loan a lot more affordable for many individuals, who may previously have been put off buying due to the high cost.
With lenders starting to offer more competitive loan products, this is having the effect of raising confidence in the housing and home owner loan markets, which in turn is likely to lead to the inevitable increase in the base rate of interest. Many experts are already predicting that rates will increase over the course of this year, with most expecting the rises to start in the second half of the year, with the likelihood of eventually reaching somewhere around the 2 per cent level by the end of the year.
