NewBuy is positive message for market
With the economy struggling to grow and continued buffeting of the banking system, it is worth reflecting again on the wider economic objectives of NewBuy. The first is to reopen a higher LTV lending market that had previously been closed as lenders retrenched following the adverse performance of new-build properties. Larger lenders have re-entered the market making cheaper smaller deposit mortgages available and in doing so supporting the second objective – building more new homes.
There is a housing shortage in the UK. While households are increasing at 230,000 a year only around 100,000 homes are being built. The housing market is a significant part of the economy. The Confederation of British Industry recently estimated 40% of the recent reduction in gross domestic product could be attributed to the slowdown in the housing sector.
The house-building industry is a major provider of employment, not just of builders, but also a range of secondary tradesmen. Plus, many construction materials are sourced from the UK rather than imported.
A buoyant housing market tends to boost consumers’ confidence in the wider economy, encouraging them to spend, which in turn fuels other sectors. There are of course risks associated with schemes that amount to intervention in a market. It is important that the scheme results in more homes being built and not just a boost for demand and hence price for new-build properties.
A scheme that protects lenders and supports builders must continue to result in a good deal for customers whose experience should mirror those making higher LTV purchases outside the scheme.
One area that has rightfully been under the spotlight is the pricing of new-build properties. Analysis shows that new-build pricing consistently exceeds the value of other modern properties and recently this gap has been expanding. New-builds command a premium but this is not sustained over time. By providing lower-deposit mortgages at cheaper rates, NewBuy could also result in a temporary increase in demand and thus prices.
The challenge for lenders and customers is to seek to value these different elements and understand the impact each has on future value.
However, this scheme sends a positive message that lenders are open for business and mortgage finance may be more accessible than some realise.
Competition is rising but lenders are wary
The Bank of England base rate has remained at 0.50% for three years, the longest hold for 60 years. Recent Moneyfacts.co.uk research has shown that as the financial and credit crisis took hold three years ago, the average deposit for a mortgage rose to 40%. It now hovers around 25% thanks to more higher LTV deals.
Over the past three years mortgage choice has almost doubled, with around 1,000 more deals on offer now. The number of high LTVs products has also increased, which is good news for prospective buyers, particularly those with restricted funds for a deposit.
While the number of mortgage deals has increased, fees are at their highest since Moneyfacts records began. Often lower rate deals carry higher arrangement and booking fees. Some products are available without arrangement fees and offer free legal and valuation fees. But these may not be the most competitive rates so it would be wise to check the true cost.
Many borrowers may have taken advantage of a low base rate by reverting to their lender’s SVRs or choosing a variable tracker rate rather than a fixed rate. In most cases, initial residential mortgage rates have continued to fall compared to three years ago. But this could be about to change as despite no move in base rate, some lenders have increased their SVRs. Borrowers concerned about the effects of SVR rises should review their repayments and consider shopping around for the best deal.
Competitive mortgage deals with rates as low as 2.54% fixed for two years are on offer. Although the base rate is stagnant, credit card and overdraft charges have risen. But loans are becoming cheaper. Personal loans are getting more affordable and this may be due to a set repayment scheme over a specific term, which is good for consumers looking to consolidate their debts.
Borrowing on credit cards may seem an easy option as they work on a simple minimum repayment system. But if customers are not careful the interest applied each month could mean a debt would never get repaid.
While competition has returned to the credit market, lenders are still cautious about who they lend to. There is no doubt that both the mortgage market and general economy will take a long time to recover from the fall out of the financial crisis and it will be many years before they show any form of stability.