Charcol tracks UK mortgage trends

With the mortgage and property landscape rapidly evolving to fit a changing economic situation in the UK, Charcol, the whole of market, fees free broker, has launched the Charcol Mortgage Monitor giving an insight into market trends and the habits of buyers and remortgagers. The first in the monthly series reviews data from 2006 and 2007 in relation to changes in mortgage type, income multiples and loan to value. Charcol’s volume and diversity of business combined with its national presence, means that it is well-placed to offer a broad view of the UK mortgage market.

Fixed vs. variable?

The end of 2006 saw a marked increase in borrowers choosing fixed rates over variable rates when Bank rate was increased for a second time. At the start of 2006, 42% of mortgages were taken out on a fixed rate, whereas this soared to 69% in at the start of 2007 when bank rate was repeatedly hiked, as borrowers moved to protect themselves. Fixed rate take-up dropped right down to 36% after August’s credit crunch and when rate cuts were announced. In January this trend continued, and fixed rate take-up fell further to 33%.

Interest only vs. repayment?

The percentage of mortgages arranged on an interest-only basis increased from 42% to 49% during the period of highest interest rates in 2007. This also reduced at the end of the year following Bank rate cut announcements, confirming that going interest-only is a popular strategy when budgets are tight. By January 2008 only 40% of new mortgages were taken out on an interest only basis. Katie Tucker, Technical manager for Charcol comments, “It is vital now that the borrowers who went interest only to help their affordability in 2006 or 2007 revert back to capital repayment, or overpay accordingly, as interest rates have started to reduce.”

Few borrowers chose to extend their mortgage terms however, the average term remained at 21 years throughout.

Income multiples

Typically ‘other’ buyers and remortgages have to borrow 3.11 times their income, however first time buyers have to borrow 3.5 times the household income. Tucker comments, “Interestingly, a multiple in excess of 3.5 is cited by the FSA as one of the three reasons your mortgage could be considered ‘high risk. Borrowers would really do wisely to overpay where possible to reduce their debt this year.

“Average income multiples dropped for both borrower types towards the end of 2007. This could be an enduring effect of many lenders removing their higher loan-to-value ranges however it will be clearer when 2008’s figures are available.”

Loan to value

First time buyers (FTB) borrow, on average, 9% more of the property value than second or repeat (‘other’) buyers. Tucker comments, “During the 2006 and 2007 period, loan to value ratios for both types maintained a constant level, for both types of borrower, although the LTV average for the last quarter of 2007 was below trend for the year for first time buyers, following the withdrawal of many lenders’ 95% and 100%-plus products, which shifted the choices downwards. The last two quarters of 2007 showed consecutive drops in actual FTB numbers. Whether this is an ongoing trend as a result of the cost of borrowing will require further observation in 2008.”

Whilst purchase loan to value ratios remained largely static throughout, remortgage loan to values took a significant downturn in the second half of 2007. Tucker explains, “This drop implies that buyers continued to borrow as much as they could based on their income and a finite deposit. Remortgagers, however, normally see their debt reduce in relation to their property value, so loan-to-value ratios are typically kept high by those who are raising capital to consolidate debts, or use as a deposit for another property. It is not surprising that existing homeowners, faced only with the higher remortgage rates than they are used to budgeting for, and prospects of decreasing value of their property, would be hesitant to take equity out at this time for other projects.”

An investigation into the quantity of buy-to-let purchases made in the same period supports that theory; an initial fall in the last quarter of 2006 coincides with the increase in rates that would have made rental cover harder to achieve. A second more obtuse drop in Q3 coincides with the liquidity crisis putting further upward pressure on the BTL interest rates, and in Q4 when confidence in the ongoing value of property fell, brining into question the prudence of investment in it.

Average age of First Time Buyers

The average age of FTB’s did not alter significantly over 2006 and 2007 and stayed in the region of 33.5; because the crucial factor would be when young people decide to buy, longer a sample duration than two years would be required to illustrate a mass change in behaviour.

What of 2008?

The average income multiple for first time buyers continued to drop from the heights of 3.61 x income in 2007, to 2.9 in January 2008. The average loan-to-value also dropped into the sixty percentile for the first time. No mortgages in excess of 100% were taken out through Charcol this month. Tucker concludes: “From the data gathered only in January, it’s already obvious that first time buyers are going to be the group to watch in 2008. Affordability is key here, as most lenders calculate loan amounts now based on monthly repayments on a realistic interest rate, instead of multiples. This means that, as interest rates have risen, the monthly payments have increased, resulting in a lower loan amount to income ratio. The scarcity of 100%-plus mortgages available at all on the market combined with consumer fear of negative equity in the current property market has bought the average loan to value down considerably as many first time buyers with little or no deposit, have stopped to think again. Property values would need to fall far enough that starter homes become bargains, at the same time as interest rates fall, before first time buyers can afford to buy comfortably again.”