Don’t abandon all hope of securing a competitive mortgage
It’s a tough market right now, thanks to the economic pressures on banks and building societies, and first time buyers are the big losers in the constant economic back-and-forth between capital and risk. The possibility of an economic collapse in the eurozone has filled UK lenders with abject terror, causing them to all but cease lending in an effort to hoard as much capital as possible in order to stave off bank failures of the kind that were seen in 2008, which has resulted in it becoming nearly impossible to secure an affordable mortgage for first time home buyers with little to put down as a deposit or who lack detailed credit histories, but the good news is that the Government is taking steps to loosen credit restrictions in order to stimulate economic recovery.
TRUST THE TREASURY
To this end, the Treasury and the Bank of England recently launched a quite noteworthy scheme this past July that has already begun to show limited success in bringing more affordable housing to British borrowers. Known as the Funding for Lending scheme, it involves offering low cost wholesale loans to major high street financial service providers as long as these banks and building societies agree to lower interest rates on their retail lending, which should in theory result in lowered costs for not just mortgages but also personal loans and business loans.
Many British lenders have come forward to accept the low-cost capital from the Treasury quite eagerly, and in response many have begun to lower the interest rates on their mortgages. However, adoption has been slow, and for the most part only those home loan offerings with the most stringent of criteria – such as the requirement of a massive deposit, sometimes as high as 40 per cent of the cost of the total loan – have had their interest rates reduced, but hopes run high that lenders in the UK will begin to reduce the interest rates on mortgages that will be more accessible to first time buyers as well.
THE BANK OF ENGLAND TO THE RESCUE
While the Funding for Lending scheme has been sluggish to actually have any universal positive effects on the mortgage lending market, another attempt by the Bank of England to level the playing field may soon become reality. The Bank, through its Monetary Policy Committee, has the ability to set the base rate on all financial products that carry interest, such as savings accounts, business loans, and mortgages, and for the past three years the MPC has kept the base rate quite low at only 0.5 per cent with the hopes that the economy would be stimulated by low interest lending.
The efficacy of keeping the base rate so low for so long has been marginal at best, as the economy has limped towards recovery much more slowly than it should be. As a result, the MPC is rumoured to be mulling over the decision to drop the base rate even further, and it is understood that such a reduction could occur before the New Year, leading to much more affordable lending opportunities for anyone applying for a loan that is linked to the Bank’s base rate, and while a few fractions of a percentage point may not seem like much of an improvement, over years of monthly repayments on a long term mortgage, the savings could be significant indeed.
This article was kindly provided by Steven Hughes from The Contractor Mortgage Center.
Posted: November 3rd, 2010 under Guest Posts.