“These are confusing times in the mortgage market. The credit crunch still casts a very long shadow, leaving many indicators of the market's health looking decidedly anaemic while many of the lenders themselves remain deeply bruised by the experiences of the past four years.
“Gross mortgage lending has average barely more than £11bn a month so far this year, which would translate into £134bn for the year, a new low in this cycle and 63% down on 2007's peak lending of £363bn. Housing transactions are equally depressed.
“And only weeks ago major lenders including Halifax and the Co-operative Bank raised their standard variable rates, citing rising wholesale funding costs due to on-going uncertainty about the future of the euro.
But, it's not all bad news
“Yet against this unpromising background we were reminded last week that things are not uniformly negative when HSBC announced the lowest ever recorded 5-year fixed rate mortgage deal with a rate of 2.99%.
“For those that want slightly longer security they also announced a 7-year fixed rate loan at 3.99%, but these deals are aimed squarely at the safest customers - both requiring a minimum 40% deposit.
“HSBC has now also announced that it approved more than £10.6bn in mortgages in the first six months of 2012, helping over 97,000 UK borrowers.
“This is an increase of 16% over the first half of 2011, and HSBC has also raised its target for lending for the year as a whole.
“So we're now seeing some serious competition being unleashed. But what do these contrasting announcements tell us about the state of the market and about the banks themselves?
“We've heard a lot about bank capital since the start of the credit crunch and more recently a lot more about how regulators around the globe want banks to carry more capital and the extra burden this is imposing on banks' cost of doing business.
“But I suspect higher SVRs from the likes of Halifax (part of Lloyds Banking Group) and HSBC's latest offering tells us much more about liquidity (cash to you and me) than capital.
“Liquidity is the blood supply of the banking system and as Northern Rock found out it is lack of liquidity that is most likely to prove fatal for a bank, killing the patient a long time before we even find out whether it had enough capital.
“The credit crunch fundamentally altered the flow of liquidity through the banking system. Until the markets seized up in summer 2007, little distinction was made between one bank and another, so liquidity flowed freely to any bank that sought it out.
“Since then the picture has been reversed with differences in risk creating dramatic differences in banks' ability to access funds and the price they have to pay for those funds in the global capital markets.
Record low government bond yields and the impact on fixed rate mortgages
“There is also a story here about fixed versus variable interest rates and how the comparison is being driven by a highly unusual phenomenon in the gilt and other government bonds markets around the globe. 10 year gilts are close to testing the 1.5% level.
“Governments including our own continue to pile up large deficits (the UK government is currently running a deficit equal to 8.2% of GDP) and commentators talk darkly about future unfunded liabilities like state pensions and healthcare costs.
“Yet remarkably investors are happy to lend our government cash for 10 years at an interest rate nearly 1.5% below the current rate of inflation.
“Other relatively 'safe' countries - such Germany, the US and Japan - are enjoying even lower funding costs (though note that both the US and Japan have deficits of similar magnitude to the UK - in Japan on top of an existing cumulative debt of more than twice their national income).
“But this investor vote of confidence does not extend to countries such as Spain, which is currently paying 6.75% to borrow for 10 years and Italy which is not far behind on 5.8%.
“An unprecedented gap has opened up between the interest rate investors demand from the safest countries, despite their own well publicised difficulties, and those they demand from countries they perceived to be descending a kind of fiscal slippery slope.
“In a flood you head for any higher ground you can find, even if you fear it won't be safe forever. Looked at from this perspective, the low bond yields of the UK are more a vote of no confidence in a lot of riskier places than a real vote of confidence in us.
What's true for countries is also true for banks
“There is a clear parallel between the divergence in the borrowing costs for the safest and the riskiest countries and the spectrum of borrowing costs for the world's leading banks.
“As funds have flowed out of countries and banks seen as riskier they have had to look for new homes somewhere else, almost regardless of the interest rate on offer.
“These funds have swollen the coffers of safer nations and banks. And few banks in the world are considered as safe as HSBC with its exceptionally strong ratio of customer deposits to loans.
“So HSBC's attractive mortgage offering and Halifax's higher SVR are more than anything, a reflection of the changing flow of liquidity as the weak get squeezed and the strong get bloated with funds they scarcely know where to deploy.
“How much further this process can go and what the consequences will be remains to be seen. But it certainly implies a further consolidation of market share in the hands of the world's strongest banks.
Low long term interest rates - a great opportunity for mortgage borrowers?
“For borrowers these conditions would seem to be an ideal opportunity to lock into the cheapest long term borrowing costs in a generation but there is a snag.
“Banks pay a higher premium to borrow for longer durations and indeed often find it difficult to borrow at all for durations over 10 years.
“As a result a longer term fixed rate mortgage market has never really developed here.
“No such constraints apply across the Atlantic. In the United States, 15 and 30 year fixed rate mortgages without repayment charges remain the standard products.
“Most of these loans are securitised through the government owned mortgage funding giants Fannie Mae and Freddie Mac and sold to investors.
“The big news in the US mortgage market in the last few days has been the record low interest rates on these loans - 3.56% on the 30 year and an astonishing 2.86% on the 15 year. Even HSBC has a way to go to beat that.”
