UK Mortgages Facing Tough Times Ahead

By: Nick Riviera

The property market is set for troubled times over the next year or two after the number of UK mortgage approvals fell by 14% in August. Figures from the British Bankers' Association showed that the number of approvals given the go-ahead for home purchases in the month was 61,051, down from 71,178 in August last year.

The number of UK mortgages fell for the third month in a row, as buyers left the market, uncertain about the financial future. For all UK mortgages, including re-mortgages, the number of approvals was 168,291 - down 8.8% from the same month in 2006. The total value of loans was ?19.1bn. For house purchases the figure was ?9.38bn, down ?1.1bn from July, and down by ?10bn compared to August last year.

Britannia Building Society's chief executive Neville Richardson said bringing interest rates down by a quarter of a percent would not be sufficient to solve the crisis in the UK mortgage market. He said: "The mortgage market will be challenging. Just lowering the interest rates will not work. Getting some liquidity back into the market would help." Mr Richardson thought that the chances of a property crash were low, thanks to good economic fundamentals.

Unlike Northern Rock, Britannia uses the global wholesale money markets) for only 25% of its borrowing (Northern Rock's level was 75%), with 60% coming from its customers, so it should not suffer like Northern Rock did.

Nationwide's house price figures showed a fall in the annual rate of inflation from 9.6% in the previous month to 9% to mid-September 2007, and the downward trend is expected to continue.

Further, the UK's biggest housebuilder, Barratt Developments reported that sales of new houses were down by 10% following the Northern Rock crisis.

Worse news for UK mortgage holders is that mortgage lenders are beginning to ask for larger deposits from first-time buyers as the credit crunch continues to bite. Deals that enabled borrowers to take out a mortgage with only a small deposit have been withdrawn by many lenders. Some deals even asked for no deposit at all. Industry watchers see this as the start of a process of providers tightening their lending conditions - and other building societies and banks are expected to follow suit.

Uk Mortgage products that lent 95% or 100% of the property values have been scrapped by the Norwich & Peterborough Building Society (N&P). Their maximum loan-to-value is now 90%. For a ?200,000 property, the borrower will now have to find ?20,000 for the deposit - in addition to other fees and costs, such as stamp duty (which on a ?200,000 property would be ?6,000). Accord Mortgages, part of Yorkshire Building Society, has also scrapped its 100% lending on UK mortgages. Alliance & Leicester has stripped back its 95% lending to only a few products, and Leeds Building Society requires a 100% loan to have a guarantor.

In particular, these changes to policy will affect first-time buyers, as the less a deposit is, the easier it will be for them to get on the property ladder.

The credit crunch and accusations of less than responsible lending has caused providers to take a look at own their lending criteria. As well as a cut back in UK mortgage products, those that offer 90% lending usually have high fees attached. Alliance & Leicester, Halifax and RBS/NatWest all have a higher lending charge for borrowing at 90% or more, claiming that it covers the increased risk associated with higher lending. The charges often amount to more than ?3,000 on a typical UK mortgage.

By contrast, Barclays, Bradford & Bingley, Lloyds TSB, HSBC and Nationwide do not charge more in these circumstances.

It is best to get as large a deposit as possible when taking out a UK mortgage, to get a lower fee, and a better interest rate.

Mortgages
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