Borrowers opt to fix, despite expected bank rate cut

“The UK lending system is in desperate need of a Bank rate cut, preferably hand in hand with a medium-term cash loan of around £20bn to ease the pressure on mortgage lenders, because sky high mortgage costs have already started to jam up the property market..” comments Katie Tucker, Technical Manager for Charcol. “Halifax has reported a 2.5% drop in property value for March, the month which saw some of the most tumultuous mortgage product changes and lender withdrawals during the liquidity crisis so far, as the cost of funding soared further for lenders.” The borrowers’ increasingly conservative attitude to risk is shown in the trends of the clients of Charcol Mortgage Monitor for March.

Fixed vs. variable?
As if 52% of borrowers taking fixed rates in February was not impressive enough, the amount of mortgages taken on a fixed rate stormed up to 64% in March. Fixed rates were priced half a percent lower than trackers or discounts, because LIBOR scaled such dizzy heights for much of March. Katie Tucker, Technical Manager for Charcol comments: It is very rare, and a sign of the turmoil in the markets, that people would opt for fixed rates, when Bank Rate is so widely expected to be cut at least once more this year but borrowers have prioritised the security of an affordable fixed rate this time, over a high rate which has the potential of falling.”

Interest-only
Interest-only borrowing fell to 41% of mortgages arranged in March, compared to 49% when Bank rate was at its highest throughout the first half of 2007. Tucker continues: “Far fewer people are arranging their mortgages on an interest only basis now. Property value is not expected to increase in the next few years, so most borrowers have realised that equity won’t be naturally home-grown, and they must repay some capital monthly. In addition, many of the borrowers who would have needed to go interest-only because their affordability was stretched, have been forced out of the buying pool following the recent advent of tightened lender criteria.”

Buy-to-let
Miss Tucker continues: “Whilst buy-to-let remortgaging remains at previous strong levels, less than 3% of mortgages taken out in March were people taking the plunge into purchasing. The high cost of the mortgages has had an immediate effect, as has the lack of confidence that property value will increase in the next few years. This should change if improving rental yields tip the balance as the rental market soaks up the displaced first-time buyers, however this could take six months to a year.”

First time buyers
Tucker continues: “The average loan-to-value for First Time Buyers increased slightly to 82%, as those buyers that could, rushed for the last of low deposit mortgage deals. Next month’s figures should reflect the low maximum loan-to-value mortgage deals left.”

First Time Buyers made up a small 7% of the mortgages arranged in March, compared to the 9% averages of 2006 and 2007. Joint first time buyers reached a one year high of 58%. Tucker explains: “The high cost of today’s mortgage rates, combined with the improved deposit-gathering power of a pair, leaves the first time twosomes in a much stronger position than those buying singly.”

One to watch:
“The average age for FTB’s was still 34, and this is likely to increase over the next two years as those who have been saving their 10% deposits return to the battleground.”