Getting a mortgage in the current economic climate
As two more lenders pull competitive mortgage deals from the market, what is the outlook for UK borrowers?
Earlier this week, HSBC-owned internet bank First Direct announced that new customers would no longer be able to apply for its products. It blamed a spike in demand and said it was making the move in order to maintain service standards for those whose applications are currently being processed.
Yesterday, The Co-operative Bank made a similar announcement. Buried within a statement from John Barker, Co-operative’s head of mortgages, the bank announced it would be temporarily withdrawing its two-year mortgage range from close of business on Thursday 3 April. The problem was not one of funding, according to Barker, but was, again, due to “unprecedented levels of customer interest and demand, which has been fuelled further by the recent actions of other lenders to reprice and withdraw their products”.
But why is this happening and how could it affect your mortgage?
It’s certainly been no secret that in recent months mortgage lenders have struggled to fund their lending to consumers. Those that rely on borrowing from other organisations (referred to as the wholesale funding) to lend to borrowers have been affected by the credit crunch, meaning money is tight. This is in turn impacting on who mortgage lenders are prepared to lend to and how much they will lend.
Not only have entire products sector disappeared (100%+ mortgages, for example), but the volume of products available to consumers in general has reduced quite dramatically recently. According to Moneyfacts, 2,026 products disappeared from the market in March alone, for instance. As a result, those lenders still offering competitive products (First Direct and Co-operative Bank before this week’s announcements) are feeling pressure when it comes to processing applications. These lenders are then left with the choice of either pulling the products or increasing the interest rates in a bid to stifle demand.
What lies ahead?
Unfortunately, we are probably in for more of the same. The Financial Services Authority has calculated that about 1.4m borrowers will be coming off cheap fixed rates this year, not to mention those borrowers coming of other types of deal, such as trackers or discounts – boosting demand for competitive products further. Many will find choice has narrowed considerably since they last looked for a mortgage, say two to five years ago. Rates will also be relatively higher compared to the past five years. Changes to the Bank of England Base Rate won’t make much difference in this environment as the problem lies with the lenders and their own ability to fund their mortgage lending.
A quick look at the best buy tables shows building societies feature quite heavily at the moment, this is because they tend to use savings deposits to fund a big part of their mortgage lending, rather than relying on the wholesale markets. So the credit crunch is not affected them as much. However, those lenders that are finding funding tight are withdrawing products or increasing rates, pushing demand towards those that are not having similar problems. Their processing systems cannot cope with the extra pressure, forcing them to pull back from the market too.
A number of building societies, especially the smaller ones, have begun to announce restrictions on their lending in recent weeks. Some, such as Holmesdale BS and Newbury BS, will now only lend within their respective local areas. Coventry BS and Manchester BS are among those that have restricted criteria, while Bath BS and Dunfermline BS have both been forced to withdraw products.
It would seem that competitive deals are disappearing from the market at an alarming rate at the moment. As a result, if you find a product that suits your circumstances, it might be worth acting quickly to secure it. It might also be useful to speak to a broker who could pinpoint suitable deals and help you submit an application quickly.
Although we would always advise borrowers to plan ahead to get the best deal, it is especially important in the current environment. It could be the only way to secure a competitive deal and keep your repayments as low as possible.
Pauline McCallion is editor of Your Mortgage and Your Money magazines
Tags: 100%+, Base Rate, best buy, broker, lender, mortgage, product, withdraw
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