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There has been much in the news lately about the Bank of England and its £50billion injecton to aid struggling mortgage lenders. Mortgage products have been disappearing at an alarming rate – especially alarming for first-time buyers and people More....
looking to refinance their mortgage – and as a result the housing market has gone into deep freeze. In a bold move, the BoE has attempted to revive the mortgage market, ease fears of both banksand consumers and put an end to this dreadful credit crunch. Whether it will be successful remains to be seen but £50billion certainly gives everybody a reason to be hopeful.
While everyone knows about the credit crunch and the ever tightening mortgage market, many may be wondering ‘what does the Bank of England’s payout mean to me?’
We hope to answer that question and others right here.
While the BoE’s emergency aid will help prevent the City from taking a hammering, what the £50bn will not do is dramatically influence house prices or mortgage interest rates. Spiralling house prices are set to continue for the time being, whereas interest rates may not fall until later in the year at the earliest. If as the Bank of England is hoping, the lending freeze starts to thaw, further interest rate cuts will be unnecessary.
Mortgage lenders have billions of pounds locked up in unsold mortgages which the BoE is willing to buy for £50 billion. In return, lenders will receive government bonds.
Government bonds entail much less risk than mortgage loans and the exchange is designed to thaw out the mortgage freeze and breathe life into the property market.
The Bank of England has stepped in to end the current stand off between mortgage lenders. Mortgage rates started to rise ever since banks stopped lending money to each other an as a result cheap mortgages were quickly made a thing of the past.
Expensive mortgages and the extinction of 100% mortgage loans has had serious implications for everyone, not least the first-time buyer. Millions of home owners who were looking to refinance at the end of a cheap deal have been unable to switch plans, succumbing instead to a great leap in interest rates.
Homeowners who were able to fix loans for two years at 4.3% in 2006 now face rates of about 5.5% for a similar plan. This interest rate hike is an extra £200 per month on a £200,000 mortgage.
The bad news is the Bank of England’s £50billion bonanza is unlikely to reverse the interest rate trend anytime soon. Even with greater liquidity in the mortgage market as a result of selling mortgages to the BoE, banks will need time before they trust each other. Also, bank’s faith in the financial market will not be restored overnight — which really is bad news for the consumer. It means it may be some time, perhaps years, before cheap mortgages appear again in high street windows.
For consumers looking to remortgage by Christmas it is advisable to start looking for a new deal now — especially for tracker loans. Tracker loan rates are dependant on wholesale money markets which basically means they can withstand market fluctuations a little better.
Consumers searching for a fixed-rate deal should hang fire until the BoEs cash injection has had time to remedy the market and because funding a fixed-rate deal is not as expensive for banks, rates could fall. However, the only certainty at the moment is that nothing in certain.
Previous generations of first-time buyers had to save for a deposit on a home at a time when it was considered normal. First time buyers of recent years however, saw saving as unnecessary and were all too keen to take on 100% mortgages – sometimes 110% or more!
In 2008, the only way first-time buyers can obtain a decent mortgage is to stump up the initial 10% of the loan. In saying that, 10% is actually the minimum, an affordable mortgage will require a 25% deposit. Sounds grim we know.
Unfortunately, lenders will not be making life any easier for first-time buyers anytime soon.
While the BoE’s emergency aid will help prevent the City from taking a hammering, what the £50bn will not do is dramatically influence house prices or mortgage interest rates. Spiralling house prices are set to continue for the time being, whereas interest rates may not fall until later in the year at the earliest. If as the Bank of England is hoping, the lending freeze starts to thaw, further interest rate cuts will be unnecessary.
First-time buyers should choose a home wisely as negative equity poses a real risk.
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