May 24, 2012

Brian Murphy is head of lending at Mortgage Advice Bureau


The one thing that Europe watchers all seem to agree on is that they can’t agree on what is going to happen in the next week, let alone the next few months. Will the euro area break up, when will Greece abandon the euro, and how much exposure do banks have and to whom?


The message for those of us looking on in the UK seems to be that we need to keep going as we are, reacting to changes whenever we need to.


For banks the situation is different, as even those who are comfortable with their exposure to mainland European debt are finding the cost of money is volatile and this has been impacting on their ability to lend. So while the Monetary Policy Committee looks like it will leave the Base rate at the historic low of 0.5% for the foreseeable, lenders are raising their standard variable rates and increasing the price of their fixed rate mortgages.


MAB’s latest National Mortgage Index shows just how this has changed since the start of the year when it revealed the average two-year fixed rate deal is now at its highest level for two years. It was 4.27% at the start of the year, but in April this had risen to 4.6%.


Similarly, the average three-year fixed rate stood at 4.53% in January but in April this had increased to 4.84%, and average five-year fixed rate had risen from 4.61% in January to 4.82% by April 2012. And the average rate on a two-year tracker is also up, increasing from 3.5% in January to 3.62% in April.


The data has show that borrowers are doing their best to protect themselves against the volatility and further rate rises with more than three in every four applicants electing for fixed rate product (78.5% April 2012).


Unsurprisingly, this has had an impact on mortgage activity for both purchase and remortgage, and the month on month growth we saw during the first quarter came to an end in April with the total number of applications falling 13% from March.


The recent news the UK has slipped back into recession shows why borrowers have become more cautious about major decisions. However, before we start looking at worst case scenarios, there are still some positives which lead us to expect that activity will not now dry up:


*    Purchase and remortgage activity was still 19% higher in April 2012 than in April 2011, and year-to-date applications are up 16% on the same time last year.

*    And while rates have increased this year they are still below pre-crisis levels. At the end of 2007 the average two-year fixed rate mortgage stood at 6.6% (compared to 4.6% in April 2012).


The total number of mortgage products fell 3% to 7,400 in April, with the total number of products available through intermediaries falling by the same percentage to 5,316. These figures are far below the peak in April 2007 when they stood at 77,966, but equally they are higher than they were during the financial crisis when they dipped as low as 3,158 in August 2009.


The positive here is that while there are fewer products available than five years ago it actually means there is a greater need for the services of intermediaries as finding the right product is more likely to require specialist knowledge and advice than when there are tens of thousands on offer.


So as the phrase goes, for the time being all we can do is keep calm and carry on.

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