Mortgages Being Repaid at Record Rates

It seems that Britain is becoming a nation of nervous homeowners if the latest figures are anything to go by.  A record £9bn was paid down between April and June as homeowners struggled to restore ailing finances.

These figures were released by the Bank of England on Wednesday and show that this record figure was paid back in the second quarter of 2011 alone – this amounts to the largest figure ever, amounting to 3.5% of post-tax income for many consumers.

In contrast, mortgage the withdrawal of mortgage equity peaked at 5.6% of post-tax income in the last quarter of 2006.

During periods where house prices were on the rise, the withdrawal of mortgage equity booster consumer spending as more and more homeowners extended their mortgages and spent the proceeds.

However, since the recession first hit in 2008, the total figure owed by Britain’s mortgagees has declined by over £92bn.

Howard Archer, of consultancy IHS Global Insight, said: “the record net injection of housing equity in the second quarter points to a strong desire and perceived need of many people to improve their personal financial balance sheets given high debt levels and serious concerns over the economic situation and jobs.”

It’s also likely that many homeowners have a very pessimistic outlook on the future of house prices and this has also played a huge factor in households attempting to reduce their borrowing.

This news provides more evidence that the economic outlook is becoming bleaker.  Households are no longer in the spending zone and are instead becoming more and more frugal, paying out more on reducing debt, and altogether being more cautious.  Whilst this is good for the individual and family households, it’s doing nothing to boost an economy that needs lifting out of the doldrums.  However, credit card lending is still rising albeit very slowly.

The Bank of England said the reversal to repayment from mortgage equity withdrawal also reflects the sharp decrease in housing transactions since the boom.

Of course, it’s not just a case of homeowners not withdrawing equity.  Many don’t have equity to withdraw on their property due to falling house prices.  This seems to be the main culprit for the change in attitudes and looks set to stay that way for the foreseeable future.

No Interest Rate Rise Until 2014

If you’re looking for a mortgage now or considering starting the search in the near future, there’s a bit of good news to come out of the City.  The Bank of England has said that it is not likely to change its monetary policy stance soon leading experts to suggest that interest rates will not rise until at least 2014.

The chances of a rise in interest rates in 2011 started to ebb away following the steady flow of depressing news regarding the British economy and worsening prospects across Europe.

Members present at the July Monetary Policy Committee meeting voted 7-2 to keep rates held at 0.5%.  The minutes of the meeting also add that members admitted that inflation would go above their prediction of a peak of 5%.

This news comes just one day after Woolwich revealed its cheapest mortgage products for over 15 years – they have reduced the rates on a third of all their tracker and fixed mortgages.

Vicky Redwood, of analysts Capital Economics said  “Our long-held view is that interest rates will remain on hold. We are not expecting interest rates to rise now until 2014 at the earliest.”

Economic forecasting company Ernst & Young’s ITEM Club also reported that they expect no change to the base rate until at least 2014.  The base rate right now is historically low and was first introduced back in March 2009 and it could be here for at least another 12 months.

Other financial analysts have said the Bank of England is “stuck between a rock and a hard place” with both growth deteriorating faster than first predicted, and inflation pressures increasing.

The Good News for Mortgage Seekers

Lenders are really starting to push there products onto the market right now and there’s a lot of fierce competition out there – great news if you looking for a mortgage right now.  Being able to fix your mortgage for 5 years at rates below 4% is a pretty good offer.  Mortgage rates are being pushed down by predictions that the base rate is unlikely to rise anytime soon and also swap rates affecting fixed rate mortgage products have also fallen.  Many lenders have their half year targets to hit and whilst funding might remain tight, the Council of Mortgage Lenders has reported that there may actually be more funding available than first expected.

Bank of England maintains Bank Rate at 0.5%

The Bank of England’s Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%. The Committee also voted to maintain the stock of asset purchases financed by the issuance of central bank reserves at £200 billion.

To fix or not to fix, that is the question

by Andy Golding, Chief Executive of Saffron Building Society

The question that every borrower wants to know the answer to is whether to tie themselves into a fixed rate mortgage deal, and at least get certainty, or whether to take a gamble on a variable rate and hope it pays off.

The answer is all a matter of what happens to interest rates. In the strangest set of economic circumstances for at least 60 years, there are many opinions but very few facts to go on.

Economists use the phrase “balance of probability” quite a bit, so what is the balance of probability for the direction of UK base rates?

Interest rates are used by the MPC to control inflation. The basic theory being that rising rates take capacity out of the economy and falling rates put it back in. With rates at an all time low and having been so for quite some time now, plus the impact of the significant Quantitative Easing programme, both designed to stimulate the economy out of recession, you could expect that now that the UK is back into growth again, that inflation could start to rise quite rapidly.

The latest readings show that high street sales picked up more than expected and the Bank of England’s survey of regional agents showed some relaxation in the availability of credit, some signs of rising pay and continued growth in the manufacturing sector.

The target CPI measure of inflation hit an eighteen year high of 3.7% in April, though has since dropped slightly to 3.4%, is still comfortably above the target rate of 2%. The RPI measure shows the cost of living having increased by more than 5% over the last year. The rise has been largely driven by the reversal of the VAT reduction, the weakness of sterling and higher fuel costs.

However, the Bank remains confident that the CPI measure will drop back below 2% within a year, as was outlined by the Governor in his letter to the Chancellor following the inflation release. The decision to keep monetary policy on hold has been unanimous until June’s MPC meeting, where one committee member voted to raise base rate to 0.75%. The MPC are also highlighting the need to tackle the fiscal deficit, although the Governor welcomed the plans he had seen last week. A credible deficit reduction strategy would increase the likelihood of rates remaining lower for longer.

The risks to the Bank’s view are that energy prices continue to rise as they have been doing, spurred on by speculators and Chinese consumption, (whose economy has returned to double digit growth) and VAT increases introduced in the emergency budget, coupled with strong exports and a continuing relaxing of credit. These factors together would push inflation higher still and would therefore put pressure on the Bank to raise rates.

So do you fix or not? Rates could rise quicker that the Bank are currently predicting. Probably not much, if at all in 2010, but potentially in 2011.

As a mortgage borrower, fixing now for, say, 5 years provides certainty of price. Fixed rates are unlikely to get any cheaper.

That said even best buy fixed rate mortgages are significantly more expensive than best buy tracker or variable rates. If Mervyn King is right, you will take a hit on additional cost unnecessarily. Either way it’s a gamble. But even at 50/50 odds, ask yourself whether you could afford your mortgage if rates went up 3.5%. On a £150,000 interest only loan that is an increase of £437.50 per month!

There is no right answer, which is why Saffron offer both fixed and tracker mortgages in order that borrowers can choose whichever mortgage they feel most comfortable with. The advice we give is always to consider what you could afford if your payments increased, and whether that increase would be unfortunate or unfeasible for your circumstances.

Saffron Building Society is a regional building society and has been providing savings accounts and mortgages to communities in the East of England for over 160 years. They offer a range of fixed rate mortgages and tracker mortgages. They have over 120,000 members and are the ‘most followed’ Building Society on Twitter! Visit us at www.saffronbs.co.uk or follow us @SaffronBS