Home truths: loans drying up once more

JUST as borrowers glimpsed some light at the end of the dark mortgages tunnel, events conspired to extinguish it.

In the weeks before last week’s economic turmoil, mortgage rates were starting to fall and there were even signs of better deals for borrowers with smaller deposits.

But the rate at which banks lend to each other (the Libor) rose to 6 per cent at the end of last week, the highest since April, making it harder for lenders to raise funds. The instant affect was an abrupt halt to the battle for market share among the biggest lenders in the market.

Since early July, fixed rates have fallen gradually as HBOS and Abbey in particular introduced increasingly competitive deals. These were primarily aimed at borrowers with loan-to-values (LTVs) of around 75 per cent or lower, but in early September the competition moved higher up the LTV chain, with some new deals at 85 and 90 per cent LTV.

However, that door could now be slammed shut again, according to Louise Cuming, head of mortgages at moneysuper market.com.

“Coupled with lenders’ ever-growing aversion to any and all risk, we can expect mortgage borrowing to become even scarcer in coming months,” said Cuming. “Once again, the most vulnerable borrowers are hardest hit and this will continue to drive through to arrears and repossession figures for those who have over-borrowed at artificially low rates in the past.”

The resulting increase in mortgage rates has started to filter through in the past few days, with several lenders upping rates or removing their best deals.

So, here’s the current state of play in the mortgage market:

Remortgages

RATES are set to rise far quicker than they came down and could stay there for a while, so if you are thinking of switching to a new deal in the next six months or so, do it now before it’s too late.

“If you have equity in your property and the disposable income to cover your mortgage there are still some good deals around,” said Cuming.

“But the percentage of people who can benefit is shrinking as lenders are becoming more anxious about who they lend to.”

There are still some deals around the 5 per cent mark, but they typically come with high fees. For instance, Cheltenham & Gloucester (part of Lloyds TSB) has a two-year fix at 4.99 per cent, but with an arrangement fee of 2.5 per cent, which means that a mortgage of £150,000 would come with a £3,700 fee.

First-time buyers

THE scenario for first-time buyers is similar, with lenders steering clear of any risk. “Just before the furore broke, the market was moving in the right direction, albeit mostly for low-risk borrowers. That’s now reversed quite quickly on the back of the Libor rate rise,” said Cuming.

According to the Edinburgh mortgage firm mform.co.uk, there are now only 36 deals available for new homeowners looking to borrow more than 90 per cent of the value of a property. The majority of lenders ask first-timers for a deposit of at least 20 per cent, with a typical arrangement fee of £1,000.

“It’s easy to see why so few have bought in the last six months,” said Francis Ghiloni, marketing and business development director at mform.

“There’s little availability when it comes to generous loan-to-value ratios and the few lenders still offering above 90 per cent tend to charge a little extra to cover the cost of the increased risk of loss in the event of a forced sale.

“ The advice to first time buyers remains to sit tight and build your deposit, this way when you do apply for a mortgage you’re more likely to avoid the hefty fees which push up the true cost of these mortgages.”

Specialist mortgages

THE days of borrowers getting on the housing ladder without a deposit or a solid income are an increasingly distant memory.

“It’s probably the right correction as there was too much money available at too high a risk before,” said Cuming. “The problem is for those people who are trapped in these deals already as they can’t borrow their way out of it, hence the continuing rise in arrears and repossessions.”

The buy-to-let mortgage market remains stagnant and last week’s events reinforce that. Lenders are focusing only on sure-fire prime borrowers and tightening their criteria to reduce or eliminate their exposure to risk, as they are in other segments on the mortgage market.

Amateur landlords, in particular, are finding their options increasingly limited. Most buy-to-let mortgages are now at an LTV of 80 per cent or lower, with higher rentals required to cover mortgage payments.