Where Next For Borrowers?

The problems with Northern Rock and the background of the credit crunch has brought into focus people’s borrowing habits. If people weren’t thinking about the extent of their debt exposure, in terms of their mortgage loans and credit cards, beforehand, then they surely should be now. Despite attempts by the government to reassure people with regard to their savings, confidence has been eroded.

House price growth has dropped from 10% per annum in July to falling in many regions in the country. In addition the Royal Institution of Chartered Surveyors (RICS) reckons there’s a 10% chance of a property crash in 2008, with a 20% chance that London house prices will drop by 10% in the next 12 months.

Home owners are looking for ways to improve their current circumstances.

Many mortgage holders will see their two-year old fixed rate deals at low interest levels come to an end in the next few months, after which, if they take no action, they will revert to a painfully high standard variable rate (SVR). The rate could go up from around 4.65% to 7.75% on average. Borrowers should look to remortgage rather than stay on the SVR, but they will certainly end up paying more than have been doing. They should look to re-fix to make the increase less awkward. First Active has a two-year fixed rate at 5.75% with a £999 arrangement fee. Stroud & Swindon has a three-fixed rate at 5.7% with a £799 fee, and Nottingham Building Society has a three-year tracker starting at 5.7% for a £695 fee. There is some debate about the future direction of the Bank of England base rate, with the popular prediction now for a decrease in the near future. However, it might still be best to re-fix as soon as possible, rather than to wait for a rate fall.

There may be a temptation for people with multiple debts (mortgage plus loans plus outstanding credit card bills) to consolidate them into a higher remortgage figure. However, given that house prices are forecast to fall in the short-term this does not look like a good idea, as you will increase your mortgage debt against a decreasing house value, giving you a higher chance of running into negative – or at least reduced – equity. The better advice is to bring spending under control instead.

If you are thinking of buying a house then the next few months might turn out to be a good time. You may well be able to negotiate a price lower than the asking price thanks to the conditions of the market. However, it is not a good time to try and make a quick buck in the property market, even if you’re looking for something to renovate, because decent offers are not likely to come your way once you’re done. If you do buy, try and put down as big a deposit as possible to reduce the chances of falling into the negative equity trap. The tendency of providers to lend to increasing salary multiples or 100%+ loan-to-value is likely to change in the wake of recent financial events.

There is some debate about where mortgage rates are heading. Fixed rates, based on the swap rate, may come down with it. Variable rates, such as trackers and discounts, are more closely based on the Libor rate which has been going up in recent weeks, may go up. The relationship of mortgage rates to the Bank of England’s base rate is looser than it used to be. As well as the rates mentioned above, Cheltenham & Gloucester has a discounted tracker at 1.01% below base rate for two years (currently 4.74%), with a 2.5% arrangement fee – therefore better for smaller mortgages. Halifax has a remortgage tracker at 0.16% below base until 30 November 2009, with a fee of £1,499.

Tom Smith
1st October 2007

Recent News:

• Mortgage Holders Advised to Fix [01.10.07]
  As Northern Rock savers queue to remove their savings from the bank, and as mortgage rates start to creep up again, experts are advising home owners to stick to fixed rates in the short term.
  
• Brokers Have Pushed Self-cert Mortgages [29.09.07]
  Homebuyers have been encouraged by unscrupulous brokers to lie about their salary and finances so that they can qualify for mortgages way above what they can really afford. Such practices, experts warn, could drag Britain down into a sub-prime crisis the like of which the US is experiencing and is having knock-on effects for finances all around the globe.
  
• Northern Rock: Any Bidders? [28.09.07]
  With the Northern Rock crisis having prompted huge numbers of savers to join queues and camp overnight in some cases just to withdraw their money from the problematical bank, Chancellor of the Exchequer Alistair Darling was forced to take action.
• Hopes For a Soft House Price Fall [29.09.07]
  Despite some bad signs for the property market, experts are still forecasting a soft landing and not a crash. Housing prices have started to fall, mortgage rates are drifting up despite a stable base rate at the moment, and consumer confidence has been hit by the Northern Rock crisis, but a crash can still be avoided.
  
• Is a tracker mortgage the right option? [28.09.07]
  It seems that there may be some better news ahead for borrowers at last. Lenders fund their mortgages from the money markets, and here rates have been dropped and economists believe that the base rate should only go up another quarter of a point to peak at 6% later this year.
  
• Northern Rock About To Call On The Money [27.09.07]
  It was only a week ago that Northern Rock got the nod from the Bank of England (BoE) that the latter would act as lender of last resort to the bank. Now it looks like Northern Rock will actually have to call on the emergency money in the next few days.
  
• US Federal Reserve Cuts Interest Rate [27.09.07]
  It is unlikely that the interest rate in the United States have ever been watched so closely the world over as it was on Tuesday 18 September.