Glimmer of light at end of the tunnel

Published on Saturday 13 June 2009 14:50

THE light at the end of the tunnel shone a little brighter for home buyers last week, as purchasers returned to the property market. However, many fear the recovery train could yet be derailed by the threat of sharply rising mortgage rates hurtling towards us further down the track.

The numbers of loans granted in April for house purchase rose by 16 per cent compared with the previous month, to 35,600, albeit from a very low base. Transactions remained 28 per cent lower than April 2008, and well below the average for April over the past seven years, of 88,000. But it was a welcome move in the right direction.

Crucially, first-time buyers also returned to the market, according to the Council of Mortgage Lenders, taking out 13,500 mortgages, an 11 per cent increase on the previous month. It is hoped this trend will continue given the reintroduction of first-time buyer-friendly packages.

Additionally, they are having to borrow less, which makes stepping on to the housing ladder that bit more affordable. In April, those taking the plunge for the first time put down a 25 per cent deposit and borrowed 2.96 times their income, which was slightly lower than March when young borrowers took on debt amounting to 2.99 their income.

Anecdotal evidence also points to the worst being over for property. Punter Southall mortgage adviser John Postlethwaite said: "Over recent months, I've had inquiries from buyers who wanted to know how much they can borrow, but who haven't sold their own properties and so weren't in a position to move. But, of late, I have seen people sell their properties within three weeks, so they could press ahead with a move.

"Good quality properties priced correctly are definitely selling quite quickly. It is only where the owners are unrealistic about the price that things are sticking."

Yet, paradoxically, this good news, along with data suggesting the recession could be over, and more positive data on the house price front, could combine to kill off these early signs of life.

Money markets are signalling that interest rates may rise sooner than expected, pushing up the cost of mortgages, which brokers fear could again make fixed-rate deals, which are so popular with borrowers, unaffordable. The CML found that 69 per cent of borrowers opted for fixed-rate deals in April, paying an average rate of 4.83 per cent.

A further spanner was thrown into the works by the Bank of England, which reported that roughly one in ten, or one million, home buyers are now in negative equity.

Mortgage expert Ray Boulger said: "If the fixed rates go up too far too fast there is a real risk that the improvement in affordability will grind to a halt."

Northern Rock, Nationwide, Woolwich and Yorkshire building societies are among the first to re-price their deals, with five-year fixes suffering the biggest rate leaps. Other lenders, including Bank of Scotland and Halifax, are expected to follow this week.

Northern Rock hiked its five-year fixes by 0.2 per cent. Borrowers with a 25 per cent deposit must now pay 5.09 per cent, while those with a 35 per cent deposit can pay 4.89 per cent. Both deals come with a 995 fee.

The Woolwich pulled its two-year tracker and replaced it with another 0.5 per cent more expensive, which tracks 2.49 per cent above base rate and is currently charging 2.99 per cent with a 1,349 fee and a 150 booking fee.

Nationwide has engaged in the most comprehensive re– pricing exercise, and is offering new customers much less attractive terms than those available to its existing borrowers coming off new deals.

Someone with 40 per cent equity in their home, who would like to remortgage with a five-year fix with Nationwide, must now pay 4.98 per cent, which is 0.86 per cent higher than before.

Boulger said: "A 0.86 per cent rate increase on a 150,000 interest-only mortgage will increase the total cost over five years by 6,450. This is a massive climb."

Existing Nationwide borrowers have cause to celebrate, though, because the rates on offer to them are considerably more tempting. In another quirk, though, the building society has introduced higher interest for borrowers who want advances which top the 150,000 mark.

Below that, you can currently borrow 95 per cent of the value of your home for a 599 fee, with a two-year tracker rate capped at 3.99 per cent, currently charging 2.99 per cent. Over three years, you can cap interest at 4.99 per cent.

The Yorkshire has lifted its rates by up to 0.5 per cent. So, for example, borrowers with a 25 per cent deposit must now pay 4.09 per cent for a two-year fix with a 295 fee, or they can fix for five years at 5.39 per cent for the same fee.