01-12-2010

Beat the Mortgage Drought

Last week, the British Bankers’ Association (BBA) warned that the number of newloans for house purchases had hit a 19-month low, while total mortgage lending wasat its lowest for a decade. One frustrated broker said that few of his applications forNatWest’s best-buy two-year tracker, with a rate of 1.99%, had been approved. Thebank then came back with question marks on every single one. One broker said that onlyabout 10% of clients meet the requirements set by lenders for new borrowers. Peopleare now not even bothering to apply for a mortgage as they feel their chances of gettingaccepted are just too slim.

There are currently 972 mortgage deals available from the biggest seven lenders — HSBC, RBS (including NatWest), Lloyds Banking Group (including Halifax), Barclays,Santander (including Abbey and Alliance & Leicester), Northern Rock and Nationwidebuilding society — compared with 411 in 2006, according to Moneyfacts, the data provider. However, while the number of mortgages available has risen, applications being approved have slumped. The BBA figures show 70,895 loans were approved lastmonth, against 195,976 in 2006. Some borrowers who have secured a deal are havingfinance withdrawn at the eleventh hour after they have paid valuation and applicationfees. Agreements in principle (AIPs) are traditionally provided by lenders after an initialcredit check and assessment of a borrower’s application, giving the green light to payvaluers and lawyers. However, AIPs are becoming less reliable and people shouldn’tassume that they will still stand in two months.

The sickly state of the mortgage market continues to push down house prices, which fell0.8% last month, according to the Land Registry. Here’s how borrowers at every stage ofthe housing market have been hit by the squeeze and how they can secure the best deal.

Applying For a Loan

The mortgage drought is forcing middle-class borrowers to seek pricier loans fromalternative “sub-prime” lenders. There are now a number of such lenders includingKensington, Aldermore and Precise, which joined the market with new deals last week.Melton Mowbray building society also improved its deals in the past few days. Lendingconstraints on the high street are forcing creditworthy high earners to use alternativefirms that charge higher rates. These lenders will accept applications from borrowerswith county court judgments (CCJs) or missed loan repayments. However, one lendersaid that an increasing number of their customers are high earners who have been shutout of the mainstream market. The average new borrower earns £42,000 a year, withone in ten earning more than £60,000. In 2007, it was mainly cash-poor borrowerswho turned to alternative lenders.

Precise introduced three-year capped tracker-rate loans last week for borrowers withone payment default in the past three years. It charges those with a 25% deposit avariable rate of 5.26%, pegged to Libor — the rate at which banks lend to eachother — and capped at 8.25%, with a 1.5% fee. By contrast, Chelsea buildingsociety has a three-year fixed rate at just 3.29% with a £995 fee, available toborrowers with a 25% deposit. The increased use of computerised underwritingprocedures at the biggest lenders means that any blip on a credit report history,however minor, could lead to a rejection. However, borrowers without a spotlesshistory should not have to go straight to alternative lenders. Brokers say those thatuse human underwriters, rather than computer credit scoring, are more likely tooverlook blips.

A handful of lenders, including the Post Office and Nationwide building society, stilloffer interest-only deals for borrowers with a 10% deposit. Those who have secureda mortgage offer should ask the lender about any impending changes in lendingpolicy that might affect their agreement in principle. Banks and building societiesusually complete a second credit check in the days before the loan is made, so anychanges to your credit file since the original agreement in principle was providedcould lead to the offer being pulled.