Borrowers suffer triple whammy with tracker mortgages, says Defaqto

April 8, 2008 | posted by Chloe Cottam in Banking, Insight, Mortgages, Press Release | comments (1) |

In the days before the credit crunch, people took out mortgages that tracked the Bank Base Rate because they thought the rate would drop in the future. The loading above BBR was generally stable in the region of 0.5% to 0.75%, depending on the length of the tracker term.In today’s increasingly difficult conditions, all this has changed. Not only has the number of available BBR tracker mortgages dropped by almost a quarter since July 2007, the higher loadings on the BBR have, on average, has more than negated the half percent decrease in BBR since then.

For two year trackers, the period with the most plans on offer, the average loading above BBR increased from 0.49% to 1.17% over the eight months since July 2007, an increase of 139%,  while the BBR rate fell from 5.75% to 5.25% over the same period.

It’s a similar picture for three year trackers with an average loading increase from 0.52% to 1.14%, an increase of nearly 120%. For the other main mortgage term products, there have been increases, even if they have not been quite as swingeing.

For the consumer the pain doesn’t stop there. Not only has the number of mortgages on offer decreased while loading percentages have increased, but application fees have seen huge uplifts since July. Fees for a typical 2 year mortgage have gone up from £688 in July 2007 to £1,005 currently, a 46% increase. This gets worse at the tracker term increases, rising to a massive 139% for term trackers.

David Black, Principal Consultant - Banking at Defaqto said: “With banks and building societies trying to repair their balance sheets in an atmosphere of financial mayhem, it is hardly surprising it is the poor consumer who is caught in the middle and is having to pay more for less choice. It is almost as though we are going back to the days when lenders felt they are doing you a favour by offering you a mortgage.”

-Ends-

Bank Base Rate

Tracker Mortgages

July 07

April 08

% Increase/  Decrease
1 year

 

 
Number

7

3

-57.1
Average % Loading

0.48%

1.19%

147.9
Average Fee

£505

£486

-3.8

 

 

 
2 year

 

 

 
Number

265

159

-40.0
Average % Loading

0.49%

1.17%

138.7
Average Fee

£688

£1,005

46.1

 

 

 
3 year

 

 

 
Number

75

74

-1.3
Average % Loading

0.52%

1.14%

119.2
Average Fee

£606

£1,016

67.7

 

 

 
5 year

 

 

 
Number

29

17

-41.4
Average % Loading

0.72%

1.04%

45.0
Average Fee

£444

£789

77.7

 

 

 
Term

 

 

 
Number

215

199

-7.4%
Average % Loading

0.75%

1.15%

53.3
Average Fee

£442

£1,060

139.8

 

 

 
All

 

 

 
Number

591

452

-23.5
Average % Loading

0.6%

1.16%

93.3
Average Fee

£573

£1,013

76.8

For further information contact:

Defaqto Limited 

David Black,Chris Johnston or Luci Mylward

01844 295 454

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Are the UK’s economic fundamentals sound and are they underpinning the housing market?

April 8, 2008 | posted by Chris Johnston in Mortgages | comments (0) |

House price movements can be seen as either a glass “half – full or half – empty” situation – it all depends on how you chose to view the figures.

The latest statistics from Halifax which show a fall of 2.5% in March, should, according to the Halifax, be viewed in the context of significant price rises last year and against the background of sound economic fundamentals which are supporting house prices.

These sound economic fundamentals are described by the Halifax as a strong labour market, low interest rates and a shortage of new houses. However, how robust is the labour market? With 62% of GDP accounted for by consumer spending and with rising inflation and with undoubtedly greater expenditure diverted to mortgage payments, the labour market is more fragile than it appears.

Are interest rates that low? The expectation is that the Bank base rate will be brought down to 5.0% or lower from its current rate of 5.25%, but this is high in comparison with the Eurozone rate of 3.75% and the US rate of 2.25%.

As to the shortage of new houses, this is not necessarily a brake on house price falls. The experience of Japan could be instructive. A boom in house prices in the 1980’s which ended in 1991 was followed by more than a decade of house price falls.

A different view of the economic fundamentals is that there is a crisis in banking, part of the financial services sector which accounts for around 10% of GDP, the Government is borrowing more than anticipated, sterling is falling, inflation is gathering pace and the high rate of consumer spending that has characterised the last ten years, has come to an end. In addition, consumer debt is at a dangerously high level.

With the economy so dependent of consumers borrowing to spend, the party is definitely over, and a new equilibrium will undoubtedly emerge in due time in which house prices assume a realistic valuation.

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All change

March 4, 2008 | posted by David Black in Banking, Credit Cards, Insight, Mortgages, Personal Loans | comments (0) |

The general concensus is that the Monetary Policy Committee won’t change the Bank of England Repo rate (base rate) in their meeting taking place this week. Expectations are that the rate is currently on a downward path although inflationary pressures may temper the MPC’s willingness to reduce further and faster.

There are clear economic worries too and suggestions that the US economy is in recession may lead to similar revelations over here in due course.

From a financial point of view the fallout from the US sub-prime credit crisis has meant that banks are generally unwilling to lend to each other and are finding it both more difficult and more expensive to raise wholesale funds.

This gives us an unusual situation.

If you’re a saver the best deposit rates are significantly out of kilter with the base rate. Ordinarily you’d expect to be doing well if you could find a savings rate that was equal to - or just below - the bank base rate. Now, however, you can beat the base rate by over 1% with certain cash ISAs or savings accounts. This is happening for two distinct reasons: firstly general eagerness to raise retail funds and secondly new entrants (typically foreign bank subsidiaries) who have to offer best buy status accounts to obtain sufficient customers through the resultant publicity. 

(more…)

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Shopping around for Payment Protection Insurance

February 24, 2008 | posted by Brian Brown in Banking, Credit Cards, Insight, Insurance, Mortgages, Personal Loans, Protection | comments (0) |

With so much press comment around about cancelling Payment Protection Insurance (PPI) we are often asked where customers who do want cover can go online to purchase standalone PPI or Income Protection Insurance (IPI).

These policies are used to protect the customer in case they are unable to make loan or mortgage repayments following unemployment or sickness.

Anyone buying PPI cover must be sure they read all the information and questions asked by the insurer to make sure they are eligible to buy the policy, and make sure they understand any exclusions which might apply to claims (such as restrictions on backache or mental illness claims, or for pre-existing medical conditions).

The following companies all sell cover on a stand-alone basis:

    

Standalone Mortgage Payment Protection

    

Provider
Web Address
Phone
Cost *
Ant Insurance
www.antinsurance.co.uk
020 8972 557
£2.36
British Insurance
www.britishinsurance.com
08450 175 178
£3.25
Churchill
www.churchill.com
0800 404 770
£4.00
Post Office Ltd
www.postoffice.co.uk
0800 633 967
£4.50
Web Money
www.webmoney.co.uk
0845 155 1931
£3.50

      

Standalone Income Protection/Payment Protection

    

Provider
Web Address
Phone
Cost *
Ant Insurance
www.antinsurance.co.uk
020 8972 9557
£2.50
iprotect
www.iprotectinsurance.co.uk
01962 877 818
£2.64
British Insurance
www.britishinsurance.com
08450 175 178
£4.05
Hitachi Capital
www.hcforyou.co.uk
0870 850 8116
£4.25
Paymentcare Ltd
www.paymentcare.co.uk
0870 428 4088
£4.40
Pinnacle Insurance
www.pinnacle.co.uk
08000 350 292
£2.69
Web Money
www.webmoney.co.uk
0845 155 1930
£4.44

* Cost is cost per £100 of cover for a 35 year old man, with 12 months benefit.  Note that premiums vary markedly and this is in part because differing policies offer different features and benefits.

    

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Defaqto comments on CML lending figures for January

February 20, 2008 | posted by Luci Mylward in Banking, Mortgages, Press Release | comments (0) |

The CML in its comment on January’s gross lending figures suggests that it was business as normal. However, it did concede that the coming months were likely to see lower gross lending volumes in the coming months.

We now await the actual composition of the lending figures. Ten years ago, the proportion of loans for house purchase was 79% of all lending; by 2007 this had fallen to 43%, with remortgaging and the buy-to-let category being the major beneficiaries of this reduction1.

David Black, Principal Consultant - Banking at Defaqto commented: “With credit harder to obtain, the housing market in the doldrums and moving costs a major consideration, don’t be surprised if the only sector of the market that is likely to show any sign of life for the next few months is remortgaging.  Those lenders with access to funds may be looking for other niche areas to bolster their lending”.

-Ends

   1CML Gross mortgage lending by type of advance, February 2008

                                                                              

For further information contact:

Defaqto Limited
David Black, Chris Johnston or Luci Mylward
01844 295 454

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Providers may widen margins at customers’ expense - Defaqto’s David Black comments on base rate change

February 7, 2008 | posted by Luci Mylward in Banking, Credit Cards, Insight, Mortgages, Personal Loans, Press Release, Savings | comments (0) |

Following The Monetary Policy Committee’s decision to reduce the Bank of England Base rate by 0.25% to 5.25%, Defaqto’s Principal Consultant - Banking, David Black comments:”This 0.25% cut by the Monetary Policy Committee was widely anticipated and comes as no surprise. I will watch with interest to see whether the full cut is passed on to both savers and borrowers but I suspect that some providers may use the opportunity to widen their margins at customers’ expense.

“Prior to this cut the average Standard Variable Rate is currently 7.55%. Last time the bank base rate was at 5.25% (between 11th January and 9th May 2007) the average Standard Variable Rate was 7.05%.”

Ends

For further information contact:

Defaqto Limited 

David Black, Chris Johnston or Luci Mylward

01844 295 454

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Now’s the time to think about offsetting

January 28, 2008 | posted by David Black in Banking, Current Accounts, Insight, Mortgages, Savings | comments (0) |

One could be forgiven for thinking that there may be something of a flight to cash given the current volatility in the world’s equity markets. For those with mortgages there’s one product genre that could prove to be a useful ally in such circumstances: the offset or current account mortgage.

The structure of an offset mortgage is relatively straightforward in that your savings balance is offset against your mortgage balance with interest charged on the net amount. So if you have a mortgage of £100,000 and savings (held with the offset provider) of £15,000 you would be paying interest only on the £85,000 net balance. 

With an offset mortgage the various accounts (typically savings, current account and mortgage) are maintained as separate accounts with the balances offset against each other to determine the amount on which interest will be levied. Current account mortgages (CAM) however have all the constituent parts held in the same account and resemble one really large overdraft. Both types effectively achieve the same result. 

There is a downside to offsets and CAMs: the interest rates charged tend to be at a slight premium to traditional mortgages but their innate flexibility may be enough to justify this premium for many customers. This is because you would effectively earn interest on your savings at the same rate that the mortgage is charged and, crucially, not get taxed on the savings element because it is offset against the mortgage balance.

Customers who should contemplate the offset route typically include those with reasonably high levels of savings in a deposit account, higher rate taxpayers, the self-employed (who may have irregular income and expenditure patterns) and buy-to-let investors. The ability to make underpayments or overpayments and to access your savings balances completes the picture.

If the offset permits you to have a current account as part of the package that’s an additional plus point.   The ability to park some cash when reluctant to be fully involved in the stock market and make the cash work for you, while retaining the ability to access it for other purposes, make another potentially powerful argument for the offset mortgage.

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The Curse of Rising House Prices

January 14, 2008 | posted by Chris Johnston in Banking, Insight, Investment, Mortgages | comments (0) |

Why is it that when fuel or food prices go up, the media is quick to react with cries of profiteering or worse? On the other hand, rising house prices are greeted with enthusiasm by just about everyone who isn’t trying to buy a house.House prices are unique in that they defy the normal rules of supply and demand. For every other product in daily life, when prices rise, demand falls. Not with houses. When prices rise, demand increases, all other things remaining equal. The reason for this is that people fear that unless they can get on the property ladder as quickly as possible, prices will continue rising and they will be excluded from owning a home, possibly for ever.

While potential buyers struggle to get into the market, homeowners are the beneficiaries of rising house prices. As prices rise, so they believe does their wealth. This encourages them to borrow and spend more, not only giving work directly to an army of loan and mortgage providers, but when this money spills over into the wider economy, it becomes an important component in the level of consumer spending that has kept the economy buoyant for the past decade. 

But at what a cost!

(more…)

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Do we really need the Chancellor’s stick or should be we really be finding ways to ensure it is never needed?

January 4, 2008 | posted by David Abbis in Banking, Credit Cards, Insight, Mortgages | comments (2) |

It is interesting to learn that Alistair Darling is establishing a procedure should another Northern Rock style crisis occur, but is this really the answer? Surely the most important measure is to ensure that no bank gets into the same situation. The problem arose because Northern Rock decided they could make money by lending to people that could not afford such a high level of debt and without a sufficient margin in the security offered.

Naturally we do not want to return to the boom and bust style of life but there are lessons to be learned or remembered from those times. I admit that I now qualify for a bus pass and life has moved on in the past thirty years but none of us can just march on without balancing the books. (more…)

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Equity release - is this the year?

January 3, 2008 | posted by David Black in Banking, Equity release, Insight, Mortgages, Pensions | comments (1) |

For a number of years the lifetime mortgage and home reversion markets have been predicted to soar but, while there has been limited year-on-year growth, it still retains the appearance of being slowly awakening. However it is a potential giant.

The potential demand is obvious yet largely untapped: inadequate pension provision, low annuity rates, increasing life expectancy together with high levels of equity built up in property over many years.

At first glance you would assume that the main demand would be to supplement income but the majority of analysis has pinpointed that equity release is mainly used to fund lifestyle aspirations - things like a new car, exotic holiday or home improvements. Other demands encompass things like inheritance tax planning, nursing care, gifting to children/grandchildren and debt consolidation. I’m convinced that the latter is going to become a growing motive particularly with the increasing trend to take out interest-only mortgages without arranging any appreciable repayment strategy. (more…)

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