Duncan Pownall, mortgage development manager at Bradford & Bingley, has reviewed the mortgage market over the first quarter of 2005 and looks ahead to what’s in store: “The mortgage market has had a fairly quiet first quarter, as expected in the traditionally slow winter months, and perhaps looks quieter compared to the unusually high levels of lending transacted the same time last year. A pick-up in activity in the spring, however, is on the cards, though at more normal levels than last year. First time buyer numbers continued to be weak – hovering around the 30% mark as a proportion of total lending, according to the CML. While the Chancellor, in his Budget statement, has given some would-be howeowners a boost by raising the stamp duty threshold, there are still large numbers, particularly in the South, that will continue to struggle.
“Despite speculation, the Bank of England base rate has so far remained unchanged at 4.75%. Indeed, while a quarter point rise in the near future cannot be completely discounted, we believe the current rate probably represents the peak of this interest rate cycle. SWAP rates have been on the move – 2-year money starting the year at 4.85% and finishing the quarter at 5.15%. This obviously had a knock-on effect on fixed rates, causing them to rise. With SWAPs now edging down, however, (currently around the 5% mark) fixed rate pricing is likely to follow suit. As predicted, house prices have stabilised and so a material drop in house prices, as speculated by some, is now extremely unlikely.
“As expected, mortgage lending has been fairly quiet throughout the early months of 2005. The CML stated that February’s lending was virtually unchanged from January’s figure of £17.3bn, while the BBA reported a 3% increase in gross mortgage lending to £11.9bn. Activity, however, is set to pick-up in the spring as the homebuying season kicks off, though at more normal levels than last year.
“The Government’s attempt to lure back essential first time buyers by doubling the stamp duty threshold will undoubtedly help some potential homeowners, especially as house prices stabilise and become more in line with earnings ratios. However, the lift to £120,000 still falls short from what could be reasonably expected, given the level of house price inflation over recent years, particularly in the South where typical first time buyer properties now fetch between £130,000 and £195,000’. Indeed, recent research carried out by Bradford & Bingley showed 42% of first time buyers wanted stamp duty abolished completely for them, while 33% wanted stamp duty bands to begin with properties over £250,000”. While we could well see first time buyer numbers creep up over the next few months, we don’t expect to see a substantial rise and certainly we don’t foresee first time buyer numbers ever returning to the previous highs.
“SWAP rates (for 2-year money) have soared from 4.85% at the beginning of January to 5.15% at the end of March – even peaking at 5.25% on the 10 March - leading to higher priced fixed rates. Indeed for much of the quarter we believe fixed rate products have been overvalued by an average of 30 basis points, largely accounting for why fixed rates have lagged behind in popularity (February’s CML figures show 38% of lending was on fixed rate deals: 62% on variable rates). Recently, however, SWAP rates have begun to move down and 2-year money is currently around 5%. As SWAPs are a key driver behind the pricing of fixed products, we would expect to see more attractive and competitive deals come to the market over the next few weeks.
“Remortgaging marginally dropped back in February but still accounts for 49% of total lending, according to CML figures. We would expect this figure to rise as some 300,000 borrowers near the end of their cheap two-year fixes this Spring“ and drop onto their lender’s standard variable rate (SVR). Indeed many will be in for a big payment shock as they jump from rates as low as 3.3% (the lowest seen in 40 years) to as much as 7% - in some instances more than doubling their monthly mortgage interest payments. While rates on all products have risen, following five interest rate rises, remortgaging to a market-leading deal can help cushion the impact.
“The Bank of England base rate has remained unchanged throughout the first quarter, despite speculation of a quarter point rise. Still reeling, though, from five rate rises in the past eighteen months or so, our research reveals that 69% of mortgage holders are concerned about further rate hikes*. While borrowers shouldn’t be overly concerned, as we believe base rate is at or near its peak in this current interest rate cycle, it is the case that those on variable rates would feel the pinch if base rate were to rise a further quarter per cent to 5.00%. It’s vital, therefore, that borrowers currently languishing on their lender’s SVR take action and remortgage onto a competitive deal. It could save them literally hundreds, even thousands of pounds.
“With the recent narrowing of the pricing differential between fixed and discounted products, base rate uncertainty and the potential uplift in first time buyers who tend to opt for security, we would expect to see the proportion of fixed rate lending rising. As a consequence of this, and the fact SWAPs are starting to fall again, we would also expect to see lenders launching more competitively priced fixed rates over the next few weeks, all vying for their slice of the mortgage cake. For those looking to fix, therefore, it may be worth holding off a little while until these new rates are available.
“For borrowers who don’t want to be tied into a rate for a lengthy period, it may be worth considering competitive short-term discount products that carry no redemption charges so they can easily switch to another product should rates move. Alternatively they could look at capped rates as with these types of products borrowers can benefit from any fall in rates yet still have a level of protection as well.”
