Mortgage Market Review CP11 - Dont panic Mr Mainwaring!

Mortgage Market Review

You will have read over recent days about something called the MMR ( Mortgage Market Review) which is the FSA’s attempt , before they disappear into the sunset, at preventing a return of the risky mortgage lending seen in boom times, by ensuring that common sense standards continue to apply in future.

Below is a summary of the proposals and then , what does that actually mean in practice.

At the core of the proposals are three principles of good mortgage underwriting:

·         Mortgages and loans should only be advanced where there is a reasonable expectation the customer can repay without relying on uncertain future house price rises.

·         Lenders should assess affordability and this affordability assessment should allow for the possibility that interest rates might rise in future: borrowers should not enter contracts which are only affordable on the assumption that low initial interest rates will last forever;

·         Interest-only mortgages should be assessed on a repayment basis unless there is a believable strategy for repaying out of capital resources that does not rely on the assumption that house prices will rise.

Key features of the proposed future regime include:

·         Income will have to be verified in every mortgage application;

·         Lenders do not have to consider in detail what borrowers spend but cannot ignore unavoidable bills, such as heating and council tax

·         Interest-only mortgages can still be offered as long as borrowers have a credible plan to repay the capital. But relying on hopes of rising property values is not enough

·         Lenders will have to consider the impact of increases in interest rates in line with current market expectations

·         Some applicants, such as those trying to consolidate debts with a mortgage, will have to get advice to ensure they understand the full implications and costs;

To be fair, that which they suggest is not what one would say is ‘re-inventing the wheel’ – simply before they lend they want make sure the customer can afford it , can demonstrate their income accordingly , and that the current situation of very low rates, is not taken as the norm.

You may have been surprised that the above did not take place already – and dare one say , if we were lending our own money, we would probably do the same.

As always thanks for your attention.

Have a good Christmas everyone.

Buying now cheaper than renting in 94% of UK towns

Buying property is now more cost-effective than it has ever been compared to renting, proving cheaper in 47 out of 50 British towns, compared to 40 out of 50 this time last year, according to research.

A study showed that renting is 15% more expensive on average than owning across the country, up from a 10% premium last year.

It examined the prices and rents of 78,000 two-bed flats currently on the market, comparing rental costs to the payments on an interest-only mortgage at 5% a year.

It found that Swansea, Plymouth and Bournemouth were the only towns where renting was a better option than buying, with rents proving cheaper by 9.3%, 6.6% and 5.7% respectively.

By comparison, renters in Milton Keynes are worst off, with rents 36% more expensive than the cost of owning, leaving them an average of £2,436 a year worse off.

Warrington and Walsall came second and third with rental premiums of 33% and 32% respectively.

In addition, renting in London is 31% more expensive than owning, despite the average cost of a two-bedroom flat standing at £442,036. Tenants in London will pay an average of £6,888 more a year than home owners.

EU threatens to end buy to let mortgages

A proposed EU Directive threatens to severely damage the private rented housing sector according to one of the largest landlord bodies, report the RLA.

The draft directive is aimed at tackling irresponsible lending on mortgages following property booms and busts in countries such as Spain and Ireland Under its provisions, when assessing the ability of the applicant to afford mortgage repayments, lenders will not be able to take account of rental income.

Given that almost 90% of English landlords are private individuals and that most purchases are made on the basis that the rental income will pay off the loan and its interest, this would cause serious damage to the private rented market.

The proposed Directive affects "consumers" but currently they are defined in such a way as to catch small landlords who have just a few properties.

There is no clear definition, but certainly it will embrace a part-time landlord who has bought two or three properties as his/her pension fund which constitutes the vast majority of the private rented market.

Speaking for the Residential Landlords Association, its Chairman, Alan Ward said:

"This Directive is nothing short of a disaster for housing in the UK. It would effectively kill off buy- to- let mortgages and would lead to a collapse in the market with far fewer properties being available for rent.

"It is imperative that the Directive is amended to take buy-to-let mortgages out of its scope."

To Firstbuy or not to Firstbuy

The government recently announced its backing of a mortgage indemnity scheme that will allow higher loan to value lending for buyers of new build properties.

The full details of the scheme won’t be finalised until the spring, but we have compared the new scheme with Firstbuy, the government backed shared equity scheme announced in this year’s Budget.

We believe borrowers looking at the new build indemnity scheme will share similar characteristics with those for whom Firstbuy was aimed at, in that they do not have a big enough deposit to borrow on the open market.

Here are the facts -

• With the indemnity scheme, the builder puts in 3.5% of the value of the property
• With Firstbuy, they put in 10%.
• This means the indemnity scheme will enable a builder to support around three times as many properties with the same sum of capital than with Firstbuy.
• For borrowers, it will not reduce monthly costs as a shared equity loan does, but it does not require the borrower to find a large cash sum at a future date.
• Borrowers with Firstbuy have to repay the equity loan in the future.
• The indemnity scheme will only be available to borrowers taking out a repayment mortgage. So, if in seven years house prices are roughly the same, those who borrowed with a 5% deposit today will be sitting on equity of over 20%, worked out using a notional interest rate of 5%. So anyone using the indemnity scheme to buy a property should be easily able to remortgage onto any product once their equity has increased sufficiently.

The main point to make though is that from a customer’s point of view, this scheme should re-open access to higher Loan to value lending, and many may find that preferable to share equity.

But, borrowers need to recognise that taking out one of these loans is no different to taking out any other 95% Loan to value mortgage, and they have to weigh up the level of risk with their desire to be home owners.

Bank of England - interest rates to rise in 2012

The Bank of England has said that mortgage interest rates could increase next year, as lenders pass on the increased costs of wholesale funding.

Its Financial Stability Report, published today, said that, since 2009, the profitability of new mortgage lending has reduced, because lenders have failed to keep rates in line with higher wholesale funding and other costs.

With costs continuing to rise, the Bank warned that lenders may start to pass this cost on to borrowers by increasing mortgage rates in order to maintain their profit margins.

The report said: "At the beginning of the financial crisis, when funding costs rose sharply, banks were relatively slow in updating the price of new mortgages and the residual remained negative for around a year.

"This suggests it may be during 2012 that any significant increase in banks' lending rates occurs."

The report added: "While credit availability was reported to have increased slightly in 2011 Q3, particularly for high LTV mortgages, subsequent market intelligence suggests that, as with corporate lending, some banks may be starting to pass on higher funding costs to mortgage customers through higher prices."

If you have concerns about how a rise in mortgage rates could affect you and would like to give consideration as to how best to protect yourself against such a rise, please feel free to get in touch.

As always , thanks for your attention.

Mark (mark@themortgagemonkey.co.uk)