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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PPI industry set for massive upheaval, says Defaqto

February 22, 2008 | posted by Luci Mylward in Insight, Insurance, Press Release | comments (0) |

Defaqto’s latest report, “Payment Protection Insurance - 2008  - The party’s over ” predicts that over the next two years there will be a  massive upheaval in the industry as lenders, underwriters and consumers are forced to adjust to consequences that will flow from the judgements of the Competition Commission.With an annual turnover of around £4.5bn and profits in the order of £1.5bn the industry is likely to suffer a severe dilution of profits when the Competition Commission’s statement of remedies is published. If this includes de-coupling the sale of PPI from that of the credit product, this in itself would have a huge impact on the industry. 

As a consequence of the inevitable tightening of the rules under which PPI can be sold, costs and charges across a wide range of other financial products and services will have to rise steeply if banks and credit card companies are to fill the holes in their balance sheets that this will create.

PPI products principally cover protection for loans, credit cards and mortgages but there are significant differences in the way the products are costed and sold. So, while the shortcomings of the PPI industry are well-documented, particularly in connection with the complexity of the products, the sale process itself, the sale to people not covered by the policy and the high cost of some plans, these findings do not apply universally.

PPI policies can and do provide a vital income stream to meet ongoing bills if accident, sickness or unemployment does strike and calls by newspapers and lobby groups to policyholders to cancel their policies could leave them seriously exposed if this advice were followed.

Commenting on the industry, Brian Brown, Head of Insight and lead author of the report said: “We must be very careful not to throw the baby out with the bathwater. PPI has been exploited by lenders as an easy source of profit, but the products themselves can be an extremely valuable.

Policyholders need to carefully examine their personal circumstances and their policy wordings and form a judgement as to whether to retain them, seek cheaper alternatives or drop them altogether.

PPI is the first safety net people fall back on before being forced to claim state benefits and PPI’s detractors should think carefully before advising people to cancel their policies unless they are prepared to accept responsibility for policyholders left unprotected by their advice.”

-Ends-

Notes to Editors:

1The report “Payment Protection Insurance - 2008  - The party’s over ” is on sale priced £1,200 excluding VAT for a PDF version and £595 (No VAT payable) for a single printed copy. For further information please contact Chris Johnston on 01844 295457, or the Sales Department on Freephone 0808 1000 804 or visit http://www.defaqto.com/

 For further information contact:

Defaqto Limited 

Brian Brown, Chris Johnston or Luci Mylward

01844 295 454

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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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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!

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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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Banks and building societies battle for cheapest mortgages

January 2, 2008 | posted by Chris Johnston in Banking, Insight, Mortgages | comments (0) |

While a bank was the cheapest mortgage lender in 2007 for existing borrowers in Defaqto’s annual survey, building societies took two of the top five places and five of the top ten.In its survey, Defaqto found that for standard variable rate mortgages or their equivalent for existing borrowers, HSBC retained its top spot as the cheapest mortgage, closely followed by two building societies, Skipton Building Society and then Nationwide.The research was based on the amount of gross interest payable on a £50,000 interest-only mortgage provided by top lenders in 2006, as defined by the Council of Mortgage Lenders. In order to provide a level playing field for comparisons, specialist providers were not included, neither are any privilege or loyalty rates.

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House prices crash? More like a death slide

December 21, 2007 | posted by Brian Brown in Banking, Insight | comments (0) |

There has been a lot of talk over the past couple of months about house prices and whether there is going to be a house price crash.   The Halifax House Price Index provides one of the best sets of data to show what actually happened the last time we had problems in the market, which could serve as a good pointer to what we could see happening over the next few years.

Halifax house prices

(SOURCE: Halifax house price index.  Chart shows the house price as a percentage of its previous highest ever price) 

Often things happen to spur a change in a market, and usually these come completely out of left field.  In the late 80s it was the removal of double MIRAS relief, after which house prices began to fall long before the exit from the ERM and interest rates going up to 15% overnight.  Today the left field ball is the credit crunch and affordability.

(more…)

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