The shifting mortgage sand
Last updated at 20:31, Saturday, 26 April 2008
With the media hungry for daily stories on mortgage rates and a possible fall in house prices, it is becoming increasingly difficult to separate fact from fiction, writes Chris McDonald of the Cumberland Building Society.
Many borrowers coming to the end of their current mortgage could be forgiven for thinking that lenders no longer want their business.
The good news is that, although the mortgage market is certainly volatile, there is still plenty of competition for remortgage business.
On the downside, while existing borrowers with variable rate mortgages will have seen their monthly payments fall, the recent reductions in the Bank of England base rate have had little effect on the rates available to new customers, or those coming to the end of an existing deal.
The real problem in the mortgage market is the lack of liquidity. Essentially, this is the accessible money banks and building societies use to cover new mortgage lending and withdrawals from savers.
The key rates which influence the price of variable-rate mortgages for new customers are something called ‘three-month LIBOR’ and the ‘cost of retail funding’.
Three-month LIBOR is the best indication of how much the banks charge each other to borrow money, and the ‘cost of retail funding’ basically means the rate they would have to pay to attract additional savings from new or existing customers.
Three-month LIBOR typically reacts to anticipated changes in the Bank of England base rate, but, with banks still reluctant to lend to each other, these two rates have become increasingly disconnected.
Since February, the Bank of England base rate has fallen by 0.50 per cent, but Three-month LIBOR has risen by almost the same amount.
As the cost of money increases on the wholesale markets, lenders are prepared to pay more to attract their other form of funding – deposits from savers. The overall effect is that the cost of providing new mortgages remains high and the availability of funds remains relatively limited.
Not all lenders are affected in the same way and you may see more competitive mortgage deals appearing from those organisations which still attract a large proportion of their funding from savers rather than being dependant on the wholesale markets.
One of the main differences between banks and building societies is that a building society can raise no more than 50 per cent of its funds from the wholesale markets.
The average proportion of funds raised by building societies from the wholesale markets is 30 per cent; most are well below this figure.
The leading banks and building societies are in discussion with the Government over ways to introduce additional funding into the market. However, while funding remains limited, lenders will continue to focus on attracting particular types of business.
With the exception of one or two lenders such as the Cumberland and HSBC, most lenders offer their mortgages through brokers as well as directly to customers.
When supply is limited, these lenders would prefer to take direct business as they will be more likely to retain the customer and won’t have to pay the broker an introduction fee.
In what could be the first of many similar moves, Nationwide recently introduced a new three-year tracker mortgage which is not available through brokers and is cheaper than their comparable two-year trackers.
Last week, Halifax also increased its two-year tracker mortgage available through brokers by 0.50 per cent.
This doesn’t mean you shouldn’t use a mortgage broker, but it is no longer safe to assume that they will be able to provide you with the cheapest products from each lender.
With mortgage products changing daily, it is also important that you are in a position to act quickly.
The rate you have been offered is only guaranteed once you have paid the arrangement fee, but you may be able to reserve this two or three months before your current deal expires.
So, if you have one of the estimated 7,000 mortgages in Cumbria and south-west Scotland which is up for renewal in the next six months, now might be a good time to start looking.
- For details of the Cumberland’s remortgage and cost comparison service, call (0845) 601 8396, pop into your local branch or visit www. cumberland.co.uk
- Your home may be repossessed if you do not keep up repayments on your mortgage.
- Chris McDonald is assistant general manager, marketing, of the Cumberland Building Society.
First published at 13:37, Thursday, 24 April 2008
Published by http://www.cumberlandnews.co.uk