Housing the perfect storm

Posted: 02/05/12

The recent media storm over London councils, including, but by no means confined to, Westminster, seeking accommodation for homeless households as far away as Stoke, Derby and Nottingham may only be the first squall in a monsoon season of bad housing news.

Homelessness is rising steeply, up by nearly a fifth in the last year, even before the impact of cuts in housing support for low income households in private flats has fully worked through the system . Now further warnings are being issued, as mortgage rates begin to drift up for the first time in several years. Nearly a million Halifax borrowers have been affected, with other lenders likely to follow suit in the coming months. The Council of Mortgage Lenders warn that repossessions are set to rise by 22%, piling further pressure onto councils that we can see are already struggling.

Frighteningly, there seems to be very little awareness of the fact that interest rates are at historically low levels, indicating that millions of householders are unprepared for the coming squeeze. Recent research by housing charity Shelter also revealed that a significant minority of home-owners already make mortgage payments on credit cards or other short-term borrowing. This year's cuts in tax credits and other in-work benefits for low-income working families will have made the situation worse still.

Homelessness arising from mortgage repossessions is unlikely to reach the crisis levels of the early 1990s, and I suspect Inner London won't be hit as badly as other areas, but one of the consequences is almost certain to be further demand for private rented homes, (not least to help councils across the UK meet their statutory duties to homeless households). This could easily push rents up further and make it harder still for London councils to meet their own needs. We are now reaping the harvest of a catastrophic failure of housing policy, and it will cost us dearly- financially, and in the misery and dislocation of families torn from communities, schools and lives that will never be the same.

Around one million homeowners were hit by a sharp rise in mortgage repayments yesterday.

Families described the increase in standard variable rate loans by the Halifax, the Co-op and Yorkshire Bank as a ‘disaster'.

Lenders came under fire for the rises as the Bank of England has not changed the base rate, currently at a historic low of 0.5 per cent, for more than three years.

Troubling times: Britain's biggest mortgage lender Halifax will push up borrowing rates today which will affect 184,000 borrowers

Troubling times: Britain's biggest mortgage lender Halifax will push up borrowing rates today which will affect 184,000 borrowers

Research from Which? found homeowners saw the price rises as ‘devastating', leaving them with an extra bill of around £300million over the next 12 months.

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CALCULATOR: The impact of a rate rise on your mortgage
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For a customer with a £150,000 loan, the increase by the Halifax will add an extra £40 a month, or £480 a year.

The bank, which was rescued from the brink of collapse by Lloyds in 2008, is raising its SVR from 3.5 per cent to 3.99 per cent, a move which will hit around 850,000 of its three million mortgage customers.

Which? chief executive Peter Vicary-Smith said one in seven customers were ‘already struggling with their repayments', even before the price rise comes into effect.

The biggest losers will be the so-called ‘mortgage prisoners' - those who cannot switch their loan to a rival bank, which means they have to pay the higher rate.
STANDARD VARIABLE RATE: HOW THE BANKS CONTROL YOUR DEBT

Standard variable rates are the name given to mortgage lenders benchmark cost of borrowing.

This is typically the rate that borrowers move onto once their initial fixed or tracker rate deal has ended.

In the past it was also often the rate at which home owners took out extra borrowing, or in some cases a simple mortgage deal offered, although this use of an SVR has all but ceased at many lenders now.

Crucially, lenders can raise (or lower) standard variable rates as they like, independent of changes to the Bank of England's base rate.

In contrast, tracker mortgages will only move with the base rate and a fixed rate is guaranteed for as long as that deal lasts.

Around 40 per cent of the 3,400 polled by Which? said higher mortgage repayments would mean they have to ‘cut back on regular spending', while one in ten would ‘not have enough for essentials'. Mr Vicary-Smith said: ‘These SVR rises are the consequence of the lack of competition in the market, and the failure of the Government to take action to promote competition.'

Experts warned other lenders were likely to follow suit in the coming weeks.

The Council of Mortgage Lenders said it was wrong to assume banks can borrow money to hand out in mortgages at the Bank of England's 0.5 per cent base rate.

A spokesman said: ‘People tend to assume the cost of funds to lenders equates to the base rate, but this is not the case. It is telling that the average rate being paid to new savers on time deposits has gone up from about 2.5 per cent a year ago to about 3 per cent now. Effectively, the cost to the lender of borrowing money from savers has risen.'

The Co-op SVR rate rose 0.5 percentage points to 4.74 per cent and the Yorkshire Bank 0.36 points to 4.95 per cent.

Rates rise: Mortgage brokers anticipate that small and medium-sized lenders will be the next group to push up interest rates

Rates rise: Mortgage brokers anticipate that small and medium-sized lenders will be the next group to push up interest rates

Why are mortgage rates being hiked?

By Simon Lambert

Mortgage lenders have claimed that the cost of funding mortgages has increased significantly and used this to justify their rate rises.

Many borrowers struggle to understand how mortgages that have already been lent out many years ago can suffer from an increase in the cost of funding.

However, this is due to the fact that with variable rate mortgages, ie SVRs and trackers, lenders balance their books on an ongoing basis. So, despite the fact that your mortgage may have been issued five years ago, your lender must balance the outstanding amount on its books at the end of every day.

Mortgage interest rates 2007-12

A number of things influence this: the cost of funding on the wholesale money markets, the cost of getting funds in from savers and also the amount of capital regulators demand banks hold against their loans.

While the Bank of England base rate has remained at a rock bottom 0.5 per cent, banks and building societies must pay about 3 per cent rate to attract new cash from easy access savers and last year saw the benchmark money market cost of variable rate funding LIBOR rise as the eurozone debt crisis sent everyone running for cover.
HOUSE PRICES FALL YET AGAIN

House prices have fallen year-on-year for the 15th month in a row, official figures showed today.

Prices dropped by 0.6 per cent both annually and on a monthly basis in March, pushing the average house price in England and Wales to £160,372, the Land Registry said.

The figures were released on the same day that more than a million home owners saw the cost of their mortgage payments go up, following a string of rate rise announcements from lenders, who have blamed the weak economy and the increased cost of funding a mortgage.

The majority of those affected are Halifax customers, who could typically find themselves paying nearly £200 extra a year, with the Co-operative Bank, Clydesdale Bank and Yorkshire Bank also among those who have made increases.

The North East recorded the biggest monthly house price rise, with a 5.6 per cent increase pushing average prices to £101,676, although on a year-on-year basis, prices in the region decreased by 2.8 per cent.

London, which has recorded relatively strong increases as the rest of the market remains patchy, saw a 1.8 per cent monthly fall, taking typical prices to £343,522, although the English capital recorded the strongest annual rise, at 0.7 per cent.

The annual price change for London, which has had strong interest from overseas buyers, has not fallen below zero since September 2009.

Wales recorded the biggest monthly and annual house price falls, with drops of 4.1 per cent and 5.5 per cent respectively, taking the typical price to £113,036.

The financial authorities are also tightening up on how much capital banks must hold, thus raising funding costs.

However, while all this means that lenders are telling the truth when they say that the cost of funding mortgages has risen, crucially they are also opting to maintain their healthy profit margins and squeeze borrowers to cover their extra costs.

In fact, while LIBOR did rise sharply last year from about 0.8 per cent at the start of August to almost hit 1.09 per cent in January 2012, it has since dropped back steadily and now stands at 1.01 per cent. (It is crucial to remember though that LIBOR is just a theoretical rate and not all institutions can borrow at this cost, those the market judges as shaky will pay more.)

Meanwhile, that 3 per cent to attract savers has been the norm for a long time and the increase in capital requirements is a well signposted and gradual course.

In reality, this squeeze is about two things: firstly lenders are trying to shore up their defences against the ongoing rumblings of the eurozone debt crisis and its fallout, secondly this is all part of the process of rebuilding their finances after the credit crunch-driven financial crisis.

Both of these things will continue for many years to come and it will be borrowers who foot the bill for repairing the damage done to banks and building societies by their own mismanagement during the easy credit boom years.

Borrowers need to do everything they can to protect themselves from this and not simply rely on their lender helping them out.

The safe places to be are tracker rates and fixed rates, which banks and building societies cannot hike at will. Without that guarantee, borrowers at the mercy of the whims of banks who will be needing to find the cash to pay the bill for their past mistakes for many years to come.

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