MORTGAGE SPECIAL
RATES While the market has perhaps not changed as much as might have been expected, one big change has been the extent to which mortgage rates (and indeed other rates for retail financial products, such as unsecured loans, credit cards and savings) have become delinked from base rates. Research from the CML states that, “Lending rates are fundamentally driven by the cost of funds, not the base rate, although the two were more closely correlated before 2006.” Now, most lenders have a cost of capital significantly higher than the 0.5% Bank of England base rate, whether that’s through corporate bond issues or through acquiring depositors’ funds by offering above-market rates to savers. Mortgage lenders’ average Standard
Variable Rate (SVR) now stands 3.48 per cent above the base rate, while back in 2008 it was only 1.95 per cent more. John Heron believes the rates have
become delinked “because of what has happened in financial markets, and
different lenders. Some, of course, have disappeared, while others took advantage of problems at Northern Rock to make major land grabs. Those with a firm deposit base and no sub-prime mortgage issues were in a prime position to expand their lending. That has led to the dominant lenders increasing their share of the market. Santander, for instance, increased its
market share from single figures at the start of 2007 to 13 per cent in 2008, and 18 per cent in 2010, though it fell back in the first quarter of this year as the bank reported lack of demand for its products. Lloyds is also well up on pre-crash levels – partly through its merger with HBOS, and also though a deal that allowed Northern Rock customers approaching the end of their fixes to move on to Lloyds fixed rate mortgages. (However, its share of the gross mortgage market slipped from 24 per cent in 2009 to 22 per cent last year.) Overall, the top six lenders increased their share from 79.4 per cent in 2008 to a
If contagion from the Greek situation is so serious that the wholesale markets freeze, we
could go downhill again.’ RAY BOULGER SENIOR TECHNICAL MANAGER, JOHN CHARCOL
because of the absolute low level of rates. LIBOR, the London Inter-Bank Rate at which banks borrow from and lend to each other, is a much better clue to what is actually going on in the markets, but the real cost of money is significantly higher than that.” That may mean the Bank of England has lost its ability to influence the mortgage market; and for anyone not on a tracker mortgage, it may well mean lenders’ SVRs will no longer synchronise with base rates. Given that the next move in base rates can only be upwards, though it may be further away than it seemed at the start of the year, that’s a frightening prospect; some lenders could well increase their SVRs by significantly more than the increase in base rate, leaving their borrowers facing difficulties.
MARKET SHARE The market has also seen a huge amount of change in the competitive situation of
20 AUGUST 2011 PROPERTYdrum
commanding 92.2 per cent in 2009, according to CML figures. That marked a reversal of the trend of the pre-crunch years, which had seen specialist lenders and other smaller rivals gaining share, as the market became more competitive and diverse. “Lenders which relied completely on
securitisation have been frozen out of the market by lack of finance,” says Bernard Clarke. That hit many of the specialists hard. GMAC-RFC for instance was in the top ten lenders in 2007; it dived to 25th place in the rankings in 2008. CML figures showed specialists taking 17.4 per cent of the total market in 2006, but falling to just 5.5 per cent by 2010. Smaller building societies also went into hibernation as raising deposits became difficult. So although the credit crunch hasn’t
killed the mortgage market, it has left it badly wounded, with higher deposit and credit score requirements, fewer products,
and a much smaller volume of business, and, crucially, with a handful of large financial institutions dominant. The top five lenders, with only the Nationwide flying the (ex) building society flag, accounted for over 80 per cent of all new loans in 2009. So though in many ways the market is
getting back to normal, it does appear to be a different kind of normal.
THE FUTURE OF LENDING Apart from the safe bet that the next move in base rates will be upward, mainly because at 0.5 per cent there’s nowhere else to go, it’s still difficult to forecast what is likely to happen in the market. Uncertainty is everywhere, from the future direction of house prices in the UK to the performance of global economies, and in particular, what happens in the peripheral Eurozone economies of Greece, Portugal, Ireland and Spain. Ray Boulger says a satisfactory solution
to the Greek crisis is critical. “If contagion from the Greek situation is so serious that the wholesale markets freeze as they did with Lehmans,” he warns, “we could go downhill very quickly again.” A finance freeze would kill all the green shoots currently seen in the mortgage market. It’s not easy to assess when base rates
might move, either. When the half per cent base rate was introduced in March 2009, marking an all time low, no one thought it would still be here more than two years later. Earlier this year, most economists were predicting an early rise in rates, but following a series of disappointing economic statistics, an early rate rise looks less and less likely. That’s led to a situation where borrowers
are loath to fix their rate, particularly on two-year fixes which had become one of the commonest products on the market. “Fixed rates can be a good option,” Michelle Slade comments, “but the fact is people are seeing news coverage saying bank rates will stay low for some time, and there’s still a gap between fixed and variable rates. There are a lot of people now on SVR because there’s not much incentive for them to move on when their deal ends.” As Catherine Hearnden says, “The Bank of England would have to raise the rate three times before trackers catch up with the fixed rate deals.” She believes five-year
The only way is up
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