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Click on any of the links below to view latest news and information from mortgageforce™ Swindon about the current mortgage market:

• Bank rate is cut to 1.5%
  
• What are Swap and LIBOR Rates?
• Mortgage Market round-up
• What's happened with LIBOR in March?
• April 1st Round Up
• Death Doesnt take a holiday - so make Will before you do!
• May 8th Market
• Long term Fixed Rates - Should I? Shouldn't I?
  

Long term Fixed Rates - Should I? Shouldn't I?

With borrowers holding out for news that bank rate has hit rock bottom, and with longer term swap rates low, we may be inching towards that mythical time when a five or ten year fixed rate could suit both sides of the mortgage transaction.

Since the last cycle of rate rises, mortgage products' features have also evolved to benefit the borrower; portability is offered by most lenders, a significant benefit in long term borrowing, and borrowers are also now used to paying higher fees: these, of course, represent better value over a longer term.

An overpayment facility allows those anticipating increasing income later in the period, to reduce their debt; and equally, an underpayment or payment holiday feature opens the consideration of long term fixing for borrowers who would otherwise have shied away from the rigidity. Being able to switch to interest only mid way through the term would be of help to young families anticipating a reduction in income for a year or so.

For most lenders, funding the lending is today's challenge, followed swiftly by meeting the demand for higher loan to values. Not only could a mortgage at 95% loan to value be in excess of 100% in less than a year if properties continue to fall in value at their current rate, but the capital ratios which lenders are required to stockpile above 75% loan to value, wipe out much of the available cash, precluding many lenders from making sufficient profit at such levels.

However, five year fixes of 4.44% have been inching their way onto the best buy tables at 60%.

There are whisperings of a recovery in the next two years, which would allow some lenders to take the view that more of the five year life of a tranche will be spent in a rising property value climate, than a falling, thus reducing risk. Predominantly though, it is the low cost of five year swaps at around 2.9% that makes the pricing more palatable: offering products at 4.44% with an arrangement fee of say 1% of your average loan size, gives a solid five year return margin of around one and three quarters of a percent.

Of course, bank rate may be cut further, or the next government rescue strategy might actually take off. However, Monetary Policy (reducing bank rate to stimulate spending) is running out of scope. The pound is also reaching lows that might be remedied by increasing foreign investment returns by increasing Bank rate.

There is always a turning point, and for some lucky punters who catch the window, a few years of joyously regaling the rest of us with dinner party tales of their 'exceptional wisdom' when remortgaging, could be on the way.

Bank rate is cut to 1.5%

Bank rate has been cut by 0.5% as expected and now sits at 1.5%.

Borrowers on existing trackers will see the effect within the next 30 days largely. I expect there to be more news about which lenders are imposing their collars, so keep reviewing the clients you have seen in the last 6 months for remortgages, who might have hit a floor on their rate now. It's important to check the offer documents the client had originally to see if the collar refers to their pay rate, or to Bank Rate. (My own collar notes are attached- might give a clue to specific lenders.)

Whilst the margins on new tracker rates are likely to be increased to keep up, few lenders have acted yet, hopefully there won't be the normal rush. That said, submit any tracker business you sign up immediately please, we don't expect any notice on rate withdrawals.

• Northern Rock have not changed margins on their range - but have extended the end dates to 1st March.
• C&G have removed their trackers from the market, new ones to be announced soon.
• Bank of Ireland have withdrawn from the Intermediary market all together, please have all business in by 5pm 9th January.

We'll keep an eye on changes to SVRs and keep you informed accordingly.

Just what are Swap and LIBOR Rates?

Hi all, Iíve had a few queries about the markets, as lots of customers are coming in wondering why mortgage rates and fees are still high despite the drop in Bank Rate to 2%.

Well firstly, rates have thankfully dropped a lot this last month following the Bank rate cut, and the best buys show that we are now getting sub 4% trackers and fixed rates filtering through. However, the lowest rates continue to be subsidised with high arrangement fees, and you will have to keep doing the maths to help them work out what arrangement would suit them best over the few years they intend to keep the mortgage.

We do tend to band about the terms LIBOR and swap rates, but you may not know the difference between the two, and most importantly, how they affect the new mortgage rates for your clients.

The rather simplified explanation of LIBOR is as follows: Itís the London Inter Bank Offer Rate, which means that, as banks lend to each other every day for short amounts of time, such as overnight, one month or three months, they tot up what rates they agreed to lend at, and we see an average of the rates for those transactions every evening. The 3 month LIBOR is the one that gives the best impression of what sort of price the lenders are paying wholesale for their short term cash, as this is the funding they will use to make trackers.

If Bank rate has fallen, the lenders believe they can replace their money a bit cheaper, and also now, as they gain more confidence in each other and believe it to be less risky handing over a load of money, (as the recipient bank is less likely to go bankrupt in the next 3 months!) they agree to lend each other money at a lower rate. We see this as the LIBOR falling day after day.

If you are a lender, and youíre getting your money at LIBOR, you can, broadly speaking, add a bit of a margin, and lend it out. For the sake of consumer understanding though you represent the price as a margin over Bank rate, such as BR + 1.99, and this, to be fair, is what has caused a lot of confusion for consumers. Lenders simply donít get their funding at Bank rate, they get it a LIBOR, but they have always listed their mortgage prices over Bank rate. Even if they did want to advertise their new mortgage prices as a margin over LIBOR, it would be a right pain changing the pay rate every night, youíd have to have daily interest (some still donít) not to mention the horrific cost of altering the KFI quoting machines, and the responsibility of explaining to clients exactly how variable their rate could be.

Yesterday the 3 month LIBOR was 2.64%. This means lenders would need to offer new deals at Bank rate + 0.64 as a minimum just to break even. However, lenders have been instructed by the government, and for their own security, to stash vast amounts of income in their own ìTier 1î capital piggy banks to give themselves a genuine asset base. They are also getting ready for a grotty year of losses as their borrowers default and money is lost carrying out repossessions and write offs. This means they have to price an extra percent or so extra in fees and rate to get more cash in. Far from ënot passing on Bank rate cutsí they simply havenít had enough of a fall in their overheads to pass on.

Swap rates work differently and are a way for lenders to secure a constant flow of wholesale money at a set price for a longer term, say two years or five years. Interest rate Swaps are slightly more complicated as they are a 'derivative', but the short, short version works like this: If I (lender A) reckon the cost of cash I can get in at LIBOR is going to average out at about 3.5% over the next two years, but another lender believes that LIBOR will in fact fall and fall, and they would have only got an average of say, 2.5% for lending the cash over the two years, I might agree with another lender to borrow money at a fixed interest rate of for two years of 3%. Iím going to be paying them a fixed rate of 3% for that money regardless. I can lend it out to my consumers as two year fixed mortgage deals of 4%, and make a nice little 1% profit (this is why fixed mortgage rates always have a specific dd/mm/yyyy end date by the way: itís because the funding for them does). At the same time, I will lend lender B money on the fluctuating rates of LIBOR. I will be secretly hoping that LIBOR in fact stays higher than 3%, and Iíve, therefore, got my long term supply of cash cheaper than if I had tried to get it from the LIBOR market, whilst this other bank will have been paying me that higher LIBOR during that time too. The other lender (lender B) is getting my 3% income without fail for 2 years.

In real life, the lenders normally agree to swap the fixed interest loan and the LIBOR interest loan with each other, then instead of actually paying each other monthly, just settle up at the end of 2 years.

One of these lenders is indeed likely to lose out ultimately- and itís a gamble to know who will be right until after the two years, but because the fixed rate of wholesale cash is there for me long term, I was able to offer fixed rate mortgages to attract all the borrowers who wanted to know what they would be paying every month, or didnít want to take the risk of their mortgage going up.

The average rate the lenders agreed their swaps at yesterday (06/01/09) was 2.61%. From this we might also be able to glean than lenders might think that in two years time the LIBOR markets will have averaged out to broadly the same as they are today (the 2.69%); it may also have been influenced by a belief that Bank rate will fall again this week, but lift slightly again towards the end of this year.

Both LIBOR and swap rates are falling now, showing that lenders do have more faith in each other and their ongoing funding sources, and pretty soon, they will have stashed all the cash they need to in their Tier 1 capital piggy banks, and paid back a lot of their government debt (where applicable). Their interest rates wonít necessarily need to be so high, they will have some freedom to take slightly more risk on loans to value, and some rather competitive deals could appear. At the same time, the first time buyers saving deposits will have got a tidy sum together, and, the UK will have the added issue of being wildly short of property as new build development has all but ground to a halt: falling short on house building targets bay about 100,000 homes a year, meaning demand could be strong. All things being well, this could indicate a very sharp upturn in house price values, itís just a matter of when.

Mortgage Market Round-up

So to get us all up to speed, here is a round-up of whatís gone on in the mortgage market during the last two weeks.

Lenders continue to be torn between two contradictory government orders; to offer competitive mortgage deals whilst simultaneously raising and stashing plenty of cash for their Capital reserves and repaying government loans. A Bank of England survey of lenders released last week showed that they plan to continue to hold back for the first few months of 2009, as a result of the falling value of property and other assets against which loans are secured. Good news is that the BoE report shows that the increase in net lending (completed) to individuals secured on dwellings (£0.7bn) was more than the increase in October (£0.5bn) which implies that lenders have started giving consumers a little more. However, the review of new business shows that only 27,000 purchase mortgages with a net value of £3.1bn were approved in November (to compare that to the previous year: there was a monthly average of 75,000 purchase approvals with a net value of £8bn at the end months of 2007, and as many as 114,000 per month in mid-2007). Remortgages fell from 72,000 in October to 42,000 in November.

More positively, The British Banking Association has pointed out that lenders are approving more loans (in fact Nationwide is approving a third more loans than twelve months ago). They claim that the fall in lending figures is actually largely due to the removal of Icelandic and Irish Banks, plus the loss of specialist lenders and small Building Societies from the market.

Nationwide has declared that it will not be passing on any further cuts- effectively imposing its collar. Halifax had been slammed in December by trying to do the same thing, but lenders simply need to continue making some profit in order to keep lending and especially to keep paying interest on savings.

Halifaxís 2nd January report showed a record low for new mortgages granted. It also reports house prices 16.2% lower in December than a year previous. This means that property value has fallen further than in the early 1990sí recession. However, one positive is that the rate of falling prices has slowed: it fell 2.2% in December meaning that for the quarter year it fell only 5.2% in Q4 compared to 5.6% in Q3. Additionally, the house price versus earnings ratio is now only 4.4 x income, significantly lower than the 6 x income that it reached in summer 2007. This will be a vital factor in getting first time buyers back into the running.

Banks acquiring hold of money in the first place is also an issue, it seems: net sterling lending by foreign banks TO UK backs has fallen by £48bn in the last quarter of 2008, leaving the foreign lending stock UK banks hold at £152bn, and is likely to continue being rationed. No foreign country wants to invest in another country that can only offer you a return of a falling interest rate (Bank Rate) and where the currency (pound) is also losing value.

The interest being paid on savings accounts is also being cut by banks as they are forced to find the money somewhere in order to pass on Bank rate cuts. The current spread between savings rates and lending rates is at its lowest ever, but needs to be wider for banks to make profit. This is bad news for savers: lenders will try to push that margin wider, which could mean some savings interest rates will have to fall to 0%!

The Conservative Party has issued a survey showing that 44% of people are concerned about meeting their mortgage payments in 2009. 15% of them are ëvery worriedí, and even 14% of rental tenants are worried about their commitments. This is a handy stat when offering redundancy cover, and more reason than ever to make sure your clients know they can come to you at any time if they get into trouble: even if you do just put them on the phone to their lender.

LIBOR closed Friday at 2.7% so have fallen a further 0.4 since December 15th, which means that lendersí cost of funding variable rates is continuing to fall.

2 yr swaps at 2.56%: also significantly lower than the 2.89% in mid-December, allowing lenders to consider lower fixed rates.

Gordon Brown commented on Sunday that they would be focussing on re-opening the wholesale money markets for lenders, which closed at the end of 2007. One strategy would be for the government to guarantee bonds issued by banks, making them more valuable and tradable as they are government guaranteed. However, concerned that the real issue is confidence in the market Mr Brown has conceded that they need to ensure that people can trust that banksí ëdistressed assetsí (toxic mortgages) have in fact been accounted for and written off. The only way to achieve that is for the government to buy them all off the banks - and he proposes to set up a ëbad bankí using taxpayersí money, to buy up all of the bad assets.

The Bank of England Monetary Committee will meet this week and are widely expected to cut Bank Rate further. This will inevitably cause lenders to push up their tracker rate margins again, at least until LIBOR and swaps fall to match the Bank rate cut, when they will be breaking even again. Last month this catch-up only took a week, but the previous cut took a full 4 weeks to be reflected in lendersí wholesale funding costs so they are likely to take a safe stance, this means we need to get in any potential applications on trackers immediately.

Why Stick On SVR? ñ Fixing Could Be Best!

• HOUSE PRICES ARE REDUCING - A further 10% reduction is forecast by the third quarter of this year. Most lenders have rates tiered at 60% 75% and 85%. If your client waits to remortgage, this could end up costing them money as their LTV increases and they fall into the next tier of products.
  
  For example: A client currently at 75% LTV decides to wait to remortgage. He decides three months later to apply and then discovers his LTV is 80%. On our current deals, this could mean an increase of up to 2.3% in the interest rate or £2,300 per year on a £100,000 mortgage!
• RATES ARE LOW ñ Currently there are a whole host of low fixed rates available. Whether it is 3.69% for two years or 4.79% for five years, the rates are lower than they have been historically. Fixing at these rates ensures that your clients are secure and will not have to experience any potential increase when base rate goes up! It may cost them slightly more now, but over the term it could save them a lot of money!
• BASE RATE WILL INCREASE IN THE FUTURE ñ If base rate can fall by 1.5% then it can rise by 1.5%. If your clients elect to remain on SVR then they will potentially experience a rise. By this point, they will also have missed out on the low deals currently available!
• WILL LENDERS PASS ON FURTHER CUTS? ñ Until now, most lenders have passed on the base rate cuts, but will they continue to? Several large lenders have already intimated that they wonít pass on further base rate reductions and in the recent one, some only passed on a small proportion of the cut ñ is this indication that rates are bottoming out?
• ALL WEATHER MORTGAGE ñ Many clients more suited to risk will prefer a variable rate. A lot of the tracker products available are over 2% above base rate and this could prove expensive if rates rise again.
• HEDGE YOUR BETS! ñ If your client is unsure then why not split there deal between a fix rate and an all weather tracker?
• EXISTING LENDER SVR ñ Please see the attached table which confirms many lendersí SVR. A lot of these can be beaten by the rates currently available and the fees will pay for themselves over the term of the rate. This table also indicates that SVR rates are getting to their lowest as some lenders decline to cut them further or by only a small amount ñ this indicates a great time to fix!
• LONG TERM BUDGETTING ñ As the economy recovers, the need for long term budgeting becomes paramount. Taxes are likely to rise and this could affect disposable income. Fixing at a low rate now means that your clients can budget for their futures!
• FLEXIBILITY - A lot of clients have decided to stay on their existing lenderís SVR because it allows them to repay the mortgage when they want without incurring early repayment charges. If this is a valid reason then why not take out one of our no penalty trackers? This gives them all the flexibility they need and gives them the comfort of the All Weather facility with rates currently as low as 4.39%!

What's happened to LIBOR in March?

LIBOR has fallen in line with the Bank rate cut this month, although swap rates have nudged down only minimally, indicating that mortgage rates are unlikely to undergo any significant changes for some time.

April 1st Round Up

Three bits of good news this week signify an improvement to the economy: firstly:

• CPI inflation (the one that doesn't count mortgage interest payments) actually rose from 3% to 3.2% last month, implying that consumer goods are not doing as badly as thought. A lot of that is increased exports- as a result of the pound being so low. The reduced threat of deflation, however, does mean the government might water down their £75bn rescue package, and not cut Bank rate to 0%- so the decision next Thursday will be interesting.
• The second bit of good news is that the Bank of England reports nearly 38,000 total mortgages offered last month, that's 19% more than January and the highest since May last year. Purchases alone though are still 44% lower than February last year.
• Thirdly, the speed of properties losing value has fallen - in England and Wales it fell only 0.6% percent in February, the lowest for 10 months. After the Bank of England implied that it wouldn't be spending its £75bn so quickly on gilts to rescue banks, gilt values dropped. This is normally mirrored by longer term swap rates increasing, which they did by about 0.1%, meaning that this might be a good time to go for that long term fix.

Death doesn't take a holiday - So make a Will before you do

Did you know that over 2000 British people die on holiday every year? So whether you're off to cruise the Caribbean or Ski in Switzerland, you really should make a will before you leave.

• A Will can safeguard your family's future as sadly, accidents do happen!
• Death doesn't take a holiday - so make a will before you do...

The process for making a will with FB Wills Direct is simple, straightforward and once your will has been signed, you can have the security of knowing that your loved ones have been taken care of.

For further information please telephone 0800 612 6968 and speak to a will advisor directly.

May 8th Market Update

It's no surprise that Bank rate has not changed. RPI Inflation may have gone to -0.4 last month but CPI (the one that does not include mortgage interest) fell to 2.9%.

The price of gas and oil is falling, and we are spending less on the high street, which will continue to bring this down - all the time this is approaching its 2% target there is no need to use Monetary policy to affect inflation. The government is keen to let their quantitative easing take effect, and it is beginning to do so: Banking shares have had two good weeks now, as has the FTSE in general, as a result of increased confidence between lenders.

As a result we have seen some lenders improve rates. Woolwich has increased the LTV bandings on many rates, or cut deals by up to 0.5%. At 1.43% LIBOR is just under 1% over base, but at 2.16%, two year Swaps indicate that the long term City thinks rates will average out over the next two years higher than they are now. Plenty of lenders have improved rates at 85% and 90%.

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