Stand & Deliver!

The Bank of England held their nerve and left base rates once again 0.5%. No great surprise there considering the political paralysis at home and the melt down in Euroland but mortgage lenders seem to have raided the dressing up box and have pulled out the Dick Turpin costume! Either that or they are taking us for fools.

There was a time when the cost of a mortgage was somehow connected to the Bank of England’s base rate and the monthly decision of the Monetary Policy Committee was awaited with baited breath and much anticipation. No longer, lenders have found that there isn’t enough money to be made charging close to half a percent so they have now chosen to ignore base rates entirely and charge what they can get away with.

Mortgage rates are 3.16% or over 7 times base rates.
It’s a scandal. Figures published today from the Council of Mortgage Lenders confirm the average outstanding mortgage rate in March was 3.66%! The ten year average is 5.45% and yet we are reckoned to have the lowest rates for over 200 years. As far as the relationship to Bank Base Rates is concerned, ‘They’re having a laugh’.

The mortgage statistics are quite sobering when you consider the average wage in the UK is just £26,000 a year. The typical first-time buyer mortgage in February was £100,000. The average outstanding rate is lower now than it was a year ago (3.83% but this is small comfort to buyers many of who are being asked for 25% deposits. 

First-time buyers gross income was £33,299 says the CML and their mortgage interest payment formed 13.3% of their income. When you add in the £25k many most are now required to save I think we can see why the number of housing transactions is about half the usual number and what is needed if you want to see more home ownership and higher trading volumes. 

Lenders fear falling house prices.
47% of borrowers chose a fix-rate mortgage in February with 36% opting for a tracker but 62% of existing mortgage holders are on variable rate products. There will be little protection for them when base rates head back up as they surely will. One reason lenders may want borrowers to stump up such big deposits is because they have concerns over the future direction of house prices and are looking to protect their deposits against a fall. Whilst ‘leverage’ or borrowing to buy a property magnifies any gain you make when house prices rise your deposit is the first to go if prices fall. The bank doesn’t want to share in your misfortune.

The average monthly ‘interest-only payment on a 3.38% mortgage of  £110,000 is £325 as against £566 for a repayment product. Neither comes anywhere close to the 0.5% that was re-confirmed again today by the Bank of England. I think that we can now admit that the mortgage rates and base rates are no longer connected and that mortgage rates seem to be more closely aligned with bank bonuses and the profits generated by the banks that these bonuses are calculated upon.