Ray Boulger: A quiet month from the MPC
Ray Boulger, senior technical director at John Charcol, comments on the news that the MPC left both Bank Rate and the size of the Quantitative Easing programme unchanged today.
“In terms of whether any policy action was required today, MPC members are unlikely to have spent much, if any, time discussing whether to change Bank Rate.
“The only decisions requiring any serious consideration were whether to add to the current £325bn of Quantitative Easing and what comments to record in order to pad out the minutes.
“As the economic outlook in both the UK and the Eurozone has deteriorated over the last month it would not be surprising if David Miles was not alone this month in voting for some additional QE.
“However, one positive piece of economic news on the inflation front over the last month has been a significant fall in the oil price.
“An additional positive factor for the housing market was today's encouraging results from Barratt Developments. Developers rely on first time buyers (FTBs) to a greater extent than the wider market and although the recently launched NewBuy mortgage scheme is not limited to FTBs they, and first time movers, are the most likely categories of buyer to need a scheme which only requires a 5% deposit.
“With most mortgages available on this scheme priced at around 6% it appears that the insurance guarantee provided by the developer and the Government to incentivise lenders to offer a 95% LTV mortgage on new build properties has done little to produce attractive pricing. Furthermore, it is ironic that the reason the Government has felt it necessary to provide direct financial support to this scheme is because of the onerous regulatory capital requirements imposed on lenders for high LTV lending as a result of Basle 2 and 3, plus EU regulatory requirements, all of which the Government signed up to.
“So the Government adopts new rules for the banks and then comes up with a scheme to get round them!
“Despite the understandable criticism about the interest rates available on the NewBuy scheme, two factors make the pricing of NewBuy mortgages more palatable than may appear at first sight.
Firstly, apart from NewBuy and Shared Ownership/Shared equity schemes, 95% LTV mortgages are not available on new build flats and even those lenders which offer mortgages up to 90% LTV in many cases have a lower maximum LTV for new build houses, let alone flats. Hobson’s choice is better than no choice!
And secondly, after the initial high interest rate most of these mortgages revert to SVR, which is the same rate for 95% LTV mortgages as for low LTV mortgages.
As all the indications are that Bank Rate will need to remain very low for several years this is a strong argument for taking a 2 years fixed rate and then reverting to what will very probably still be a much lower SVR.
“For those potential purchasers whose main problem in getting a mortgage is finding the deposit, even a 2 year fixed rate as high as 6%, but then reverting to an SVR currently around 4%, will be a price well worth paying if it means they can buy their own home.
“In order to reduce monthly payments many of these purchasers will be young enough to qualify for a 35 year term if they need to keep monthly payments as low as possible.
“After the first 2 years they could then make regular overpayments, assuming their rate falls significantly at that time, the effect of which would be to shorten the term.”
A STRATEGY FOR OTHER BORROWERS
“Over the last month a few SVRs have increased and mortgage rates for new borrowers have mostly continued to rise.
“However, a few lenders have started to cut rates and this, coupled with the fact that gilt yields and swap rates have fallen and are close to all time lows, suggests that the recent upward movement in new business rates has little further to go.
“Over the next month we are more likely to see a mixture of price changes from lenders, some up and some down, as they try to fine tune their application volumes.
“Over the medium term the increasing strains in the Eurozone will continue to be a major drag on both the UK economy and lenders’ ability to raise funds on acceptable terms in the wholesale markets.
“For many borrowers a choice between a term tracker or paying a relatively small premium for the security of a 5 year fixed rate will be a good basis to start considering their options, whether buying a property or considering a remortgage.
“The SVR hikes will increase the attraction of a remortgage for those borrowers directly affected, especially if they have at least 15% equity in their property.
“Many of these borrowers will be able to remortgage to a cheaper rate, either staying variable or switching to a fixed rate.
“However, despite the encouraging comments about interest only mortgages at the Building Societies Conference today by CEO designate of the Financial Conduct Authority, Martin Wheatley, most borrowers with interest only mortgages will struggle to remortgage to another interest only deal. As ever good independent mortgage advice will be critical in securing the right mortgage.”
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