Writing in today’s Daily Telegraph, Ian Campbell explains:

The problem stems from lack of funds for both lending banks and first time buyers. Lending banks previously relied on deposits made by UK savers backed up by borrowing from residential mortgage-backed securities (RMBS) – two thirds of RMBS were sold to foreign investors. Then, in 2008, the RMBS market ceased to exist, having been bought by the US Federal Reserve. The Bank of England set up two special funding schemes to help fill the gap left by the RMBS but both are due to end in 2014. When that happens, the Council of Mortgage Lenders calculates that Britain’s lenders will face a funding gap of £300 billion.

These are the facts behind the rise in deposits – first-time buyers are being asked for almost three-times the deposit they would have put down three years ago. No wonder then that, whilst mortgage approvals improved last year, they only reached half the levels of the boom years.

So, lack of funds leads to lower house prices; the average would have to fall 17% for the ratio of price to earnings to get back the long term level of 4 from the current 4.8. The powers that be need to make a concerted effort to prop up growth and earnings if the property market isn’t to fall even farther than before.

What is a bonus? Certain employees, within certain business units of a company will expect a bonus. They will receive a good solid base salary which will pay the mortgage and then some but on top of this they will expect a bonus of anywhere from 10% to around 200% of their salary. This bonus system covers the majority of workers in financial institutions. Of course there are the super bonuses, usually awarded to the old heads of the departments and the young ‘rain makers’ who bring in fresh clients or invent a new revenue stream.

Why do they receive so much money? It’s quite simple. These people work in the crux of the financial centre, where, quite literally all the money in the world siphons through. They stick one little finger out into the trickle of billions… trillions and a minute amount sticks.

When a £50 million commercial property sells in the City the fees for handling the transaction will be approximately:

Agents fees 1.00%    = £500,000

Lawyers fees 0.75%   = £375,000

Valuation fees             = £   35,000

Of course the ‘successful’ deal will be highlighted in the back pocket of the fund mangers from both sides, payments which directly affect the bottom-line of the company’s profits, its shares and therefore your pension.  Not to mention the cash made by the commercial mortgage-backed securities teams (CMBS), which have all but disintegrated in the wake of the financial collapse.

Yes these men and woman are hard working and yes in general they are quite intelligent. However, they are more intelligent for deliberately placing themselves in the right business unit within the right industry than anything else. They could have been successfully selling £50,000 units in Hull, but that industry is not swimming in billions.

The property was sold for £50 million in early 2007. Every party involved got paid. Everyone got a bonus. Now it’s probably worth around £35 million. No one hands the bonus back, paid for by your pension shares depreciating. This is the flaw, there is no long term on the decisions made by the parties involved and not one single party within the cycle has a reason to stop the sale. There are no financial police in deals like this.

The bonus culture will not stop until companies and more importantly the heads of departments and CEOS’s are accountable for losses as well as profits made in the long term.

A year ago, prior to nationalisation of the bank, this figure stood at just 0.45%.

Northern Rock have cited the current economic climate as the main reason for the shocking figures above, but it cannot be ignored that the Rock’s ‘Together’ mortgage, which allowed customers to borrow up to 125% of the value of their home, has played a significant part in the arrears turmoil.

Figures released by Northern Rock at the beginning of March 2009 showed that over 4.5% of customers with ‘Together’ mortgages were more than 3 months in arrears – up almost 1% on the previous year and more than twice the industry average of 1.88%. Although Northern Rock withdrew Together mortgages from the market over 12 months ago, the future looks very bleak for some existing customers with this product.

When Northern Rock was nationalised, the Government promised that it would be sympathetic towards customers in arrears with their mortgage, and that it would wait at least 6 months before beginning repossession proceedings. However, it has been revealed that, by the end of 2008, the bank held 3,620 repossessed properties, up 63% on the previous year.

They bank has thus been accused by several charities of using ‘aggressive’ tactics to seize back homes, but Chief Executive Gary Hoffman has said that repossessions are ‘an unfortunate effect of the current ‘external economic backdrop’ and that they will continue to work closely with affected customers to keep enforced possessions to a minimum’.

At the end of 2007, figures showed that Granite (the securitisation company set up by Northern Rock in 2001) had lost £10.2 million pounds through repossession since its inception, yet by the end of December 2008, the figure had risen to almost £46 million – a huge increase of 350%. Northern Rock confirmed that they had total losses of almost £1.4 billion for 2008, largely due to bad loans, yet they have recently announced £14 billion of new mortgage lending (maximum LTV 85%).

With the economy in freefall and more repossessions likely, it looks like Northern Rock will incur further losses, meaning that it will remain under state control for much longer than expected – the Government hoped the loan would be paid off by 2010, but in reality it could take several years more.

Despite all this, Northern Rock plan to award large bonuses to some 500 executives, creating widespread anger. Only last week, the Prime Minister stated that bankers associated with any losses should not receive a bonus.

However, Northern Rock has justified the bonuses by saying they are paid for financial performance and customer satisfaction. Senior executives did not receive cash bonuses for 2008 or 2009 and have had their pay frozen, along with the promise of deferred payments. Several thousand employees did receive a total of £9.2 million in bonuses in 2008, while a few hundred junior managers are also eligible for deferred bonuses (thought to be paid in 2010).

For those Northern Rock customers living with the threat of repossession, this must seem like a real smack in the teeth.

On the 23^rd February 2009, Northern Rock announced that it was to increase its mortgage lending capacity within the market, following close consultation with the Government. It will launch a whole new range of mortgages for both first-time buyers and those remortgaging.

This means that existing Northern Rock customers will have greater choice when their current mortgage deal comes to an end, rather than being encouraged to look exclusively outside of Northern Rock. Indeed, the increase in availability will surely benefit both those seeking to purchase a home and those looking to remortgage.

Gary Hoffman, Chief Executive of the bank, said of the move: ‘Since entering public ownership, we have concentrated on reducing the balance sheet through a mortgage redemption programme….only writing a limited amount of new lending. We can now return to the mortgage market on a commercial basis, and this represents an important step in the ongoing rehabilitation of the company, returning to financial viability and ultimately returning to the private sector’.

Northern Rock went into public ownership in February 2008, and from that point mortgage lending was cut right back and all effort concentrated on repaying loans worth billions to the treasury. However, £14 billion of the money loaned by the Government will be used to generate new mortgage lending over the next two years; £5 billion this year and £9 billion throughout 2010.

For Matthew Sinclair, Research Director of the Taxpayers’ Alliance, the Rock’s new range of mortgages should raise cause for concern. He says:

“Building Northern Rock up again as a big lender while it is in the state’s hands is highly troubling. There is a serious risk that their access to taxpayer financing could lead to highly unfair competition against the remaining private sector operators in this market, and make things worse for the sector.

Beyond that, the current conditions show quite how risky the mortgage loans business is. Very few private investors are willing to put their money into that market, so why is the Government happy to do so on our behalf?”

In fairness the mortgages, available from 25^th February 2009, do encourage responsible lending and are competitively priced, but unfortunately they are not focused on first-time buyers with little or no deposit: Gordon Brown wants to banish 100% mortgages altogether, and with the new range of mortgages, no more than 85% of a property’s value will be loaned – before, the Rock offered 125% mortgages.

However, 85% is competitive, as many other lenders typically require a 20% deposit: this will aid both first-time buyers and those re-mortgagors whose property has perhaps fallen in value and is now in the 90% LTV bracket.

The new residential mortgage range from Northern Rock comes with free basic valuation and free standard legal work, and customers are offered a choice of fixed-rate mortgages over various terms (2, 5, and 10 years). In addition, there are 3 LTV (loan-to-value) tiers – 65%, 75% and 85%.

Customers can choose to pay a fixed fee of £995 or take the ‘fee saver’ option (free valuation and legal work), and the interest rate they pay will differ accordingly – see tables below for details:

2 year flexible fixed rate mortgage:

5 year flexible fixed rate mortgage:

10 year flexible fixed rate mortgage:

These mortgage rates are very competitive; in fact, the 2 year fixed rate at 3.89% is currently named as one of the best buys on the market. However, a 65% LTV is required, discounting many homeowners and first-time buyers.

These mortgage rates are very competitive; in fact, the 2 year fixed rate at 3.89% is currently named as one of the best buys on the market. However, a 65% LTV is required, discounting many homeowners and first-time buyers.

For these consumers, the 85% LTV tier may be an only option – the fact is that people who could not afford to get on the property ladder or to move now can and rates of 6.29%-7.09% are not too bad at all, being broadly in line with other lenders.

All Northern Rock mortgages (with the exception of the lifetime ‘equity release’ mortgage) offer full flexibility, including the possibility of overpaying.  For more details, visit the Northern Rock website.

We would like to hear from anyone who had any experience with Northern Rock mortgages.

As a result, many people claimed back their bank charges with the help of template letters on money saving websites, and in just two years the banks had repaid an incredible £1 billion pounds to customers, with some individuals receiving £30,000.

In July 2007, the OFT (Office of Fair Trading) disclosed that it was taking the banks to court following the bank charges fiasco, and, as a result, all claims were put on hold by the Financial Services Authority until the court case was concluded – however, those customers who could prove they were suffering from financial hardship as a result of bank charges were exempt from this move.

In April 2008, it was concluded that bank charges should be subject to fairness rules, but the banks appealed the decision. In October of the same year, it was concluded that charges were indeed unfair, which the banks once again appealed.

Finally, on the 26^th February 2009, the banks’ attempts to overturn the OFT’s decision was dismissed – the high court ruled in the OFT’s favour, which meant that bank charges could finally be tested for fairness. Crucially, this could mean the banks will be liable to pay back at least £15 billion to affected customers.

However, the British Bankers’ Association has stated that the banks may appeal to the House of Lords over the decision, meaning the OFT investigation may be delayed by a further 6-12 months; if the banks decide against appealing, customers will still have to wait until the OFT investigation has been concluded (thought to be later this year).

The OFT stated how the courts have found that bank charge terms are ‘not part of the core or essential bargain between a consumer and their bank’ and thus ‘consumers have protection under the ‘unfair terms in consumer contract regulations……we are now analysing the implications of the judgement for our ongoing investigation’. It is now up to the OFT and the banks to decide what constitutes ‘fair’ bank charges and to implement these.

If you have accrued any bank charges, you can claim back all such charges going back 6 years, and this may add up to a tidy sum. Although all claims have been put on hold until the OFT case is concluded, you can still send in your claim – if the banks decide against appealing or eventually lose the case, there will be a huge backlog of claims, so it is wise to get your application in early.

Guides and template letters are available on money saving websites. It has been said that, should the banks be defeated, charges will automatically be refunded to customers – apparently, RBS has already got plans in place to do this. However, this is highly unlikely and customers will probably have to apply for their refunds.

Banks prefer customers to use the financial ombudsman service to settle any charges disputes, but the ombudsman takes a long time to resolve matters and does not make awards of interest. Going through county court is a much quicker process, interest is awarded, and the court has the authority to demand that improper credit file histories are removed.

Regarding the hardship issue, Marc Gander, co-founder and owner of The Consumer Action Group, says;

“None of the banks have published any set of rules which indicates to people what is hardship and what isn’t. The Consumer Action Group has had hundreds of people on benefits and in great difficulty applying to the banks for the refund of their bank charges on the basis of hardship and it is extremely rare that the banks have taken any notice and have refunded any money.

In some circumstances they supply a form which has to be completed with details of incomings, outgoings, etc and in most cases the decision is taken that the claimant is not in hardship….in the few cases where the bank has agreed that there is hardship, the bank has not offered a full refund, it has offered a partial refund – typically about 50% – in full and final settlement

This is a vicious and callous attempt to leverage hardship in order to deprive
people of their full final settlement”.

In the meantime, despite the waiver on bank charges claims, the banks continue to charge customers and use enforcement to recover debt: people are still being threatened with court action for the recovery of bank charges and some are even faced with the threat of repossession.

This is grossly unjust: for the past two years, people have been prevented from asserting their rights in the County Court, yet for the banks it is business as usual, despite the OFT stating that the charges are indeed unfair.

We would like to hear your thoughts whether these overdrawn bank charges are excessive.

With the economic crisis deepening further still and expected to get worse throughout 2009, lending criteria will become stricter and more homeowners will find it tougher still to remortgage. With major lenders experiencing financial problems of their own and the rapid decline in house prices, obtaining a good mortgage deal is more difficult than ever – especially for those in negative equity or those with adverse credit histories.

To try and breathe life into the housing market and get it moving, the Bank of England has cut the base rate of interest four times since October: the latest in March saw the base rate fall to an all-time low of 0.5%, with further cuts predicted before the end of 2009. This has meant good news for those with tracker mortgages, some first-time buyers and some re-mortgagors, but many homeowners have not benefited, for various reasons.

Some lenders have not passed interest-rate cuts onto customers (some tracker mortgages impose a collar, which means the interest rate cannot fall below a certain point) and competitive mortgage products are often withheld from those with high LTV (loan to value) mortgages: this refers to the amount of mortgage versus the value of the home, and many people have found themselves with a high LTV as a result of the slump in the housing market.

Even though lenders are able to pass interest cuts onto customers, few are doing so: only a handful have reduced their standard variable rate accordingly. So, for people wishing to remortgage at this time, finding a good deal is harder than ever. Here to help is a brief guide to the different popular types of mortgage and the pros and cons of each:

Tracker Mortgage: a tracker mortgage is linked to the Bank of England interest rate and thus, not surprisingly, this type of mortgage is very popular at the moment. In respect of this, a tracker mortgage is a more attractive option at the moment than the discount mortgage, given that these types of mortgage follow the BOE base rate rather than a lender’s SVR. The table below shows the best tracker mortgage deals on the market at present:

Please note that the above calculations are based on a loan of £150,000 with a LTV of 60% and a mortgage term of 25 years, and the type of mortgage you may be offered is subject to your personal circumstances.

If you are interested in switching to a tracker mortgage, try and find one with no redemption penalties (although these are few and far between at present!): this way, if interest rates start to increase you can switch to a fixed rate mortgage.

Fixed rate mortgages have always been very popular as they allow people to budget long-term: whatever payments are set at, they remain at that amount for a determined period, usually 2 or 3 years. The following table shows the best fixed rates on the market at the moment, based on the criteria above, but remember any deal you may get is dependent on your personal financial circumstances:

The key when remortgaging is to be prepared: start looking for a new deal a few months before your current deal ends, in order to spot the best deals in advance. This is worth doing, as most deals are valid for 3-4 months; some are even available for 6 months.

Make sure you take into account all upfront fees involved in remortgaging (such as valuation and arrangement fees) and redemption penalties, so that you can be sure remortgaging is going to be profitable in the long term. Consider approaching your current lender to see what they can offer you; if they offer you a good deal, you will save hundreds in upfront fees and be spared the hassle of switching providers.

If, for some reason, you cannot remortgage and find yourself on a standard variable rate, don’t panic: at the moment, rates are very low and so the move should not affect you too much. Also, there is no tie-in period with the SVR, thus in a few months you may be in a position to secure a better remortgage deal.

Finally, navigating the remortgage market can be very daunting: if you are having problems finding the perfect remortgage to suit your personal circumstances, enlist the help of a mortgage broker.

As Robert Sinclair, Director of the Association of Mortgage Intermediaries (AMI), says;

“Even with a more restricted range of lenders and mortgage products, the issues and pitfalls facing people are well set out.  The need for help from a mortgage intermediary who can explain the various issues and then recommend the most appropriate product has never been greater. This is where a mortgage intermediary’s knowledge of the market has its greatest value”

British households are repaying record amounts of mortgage debt, sharply reversing the trend that saw many consumers using their homes as “ATM’s” to fund spending as they moved into positive equity. The turnaround reflects depressed household confidence and the diminished value of housing.

The Bank of England said yesterday that households paid off a net £8bn of mortgage debt in the last quarter of last year, the equivalent of 3.3 per cent of their post-tax incomes. Some £5.9bn was paid off in Q3 2008 so we would assume that this trend has continued. However, as recently as 2006 some £13bn was being withdrawn every quarter, the equivalent of about 6 per cent of disposable incomes. Some of these funds represented a normal flow of money into funding retirement incomes, but a good deal was simply spent on a better lifestyle such as holidays.

Simon Rubinsohn, chief economist at the Royal Institute of Chartered Surveyors, said: “The constraint on household borrowing from the loss in value of residential property contributed in no small way to the 1 per cent decline in consumer spending in the fourth quarter. The likelihood is that despite tentative signs of a stabilising in activity in the residential market, homeowners will find it difficult to resume extracting equity from property for the foreseeable future. This will provide a further obstacle to a recovery.”

Taking last week’s sharp rise in the savings ratio, from minus 1 per cent to plus 4.8 per cent, the evidence suggests that British households are not yet ready to respond to official encouragement from measures such as the VAT cut and invade the shops. Note: We would have to say the VAT cut is basically useless, how would a 2.5% reduction in any cost other than our mortgages make a real difference in our lives?

Charles Wasdell, head of research at Propertyfinder, added: “In the early 2000s many people treated their home like a cash machine, withdrawing over £300bn between 2000 and 2007.”

However, prospects for manufacturing seem to have increased. The Chartered Institute of Purchasing and Supply (Cips) registered a significant upswing in business confidence in March, albeit from historically low levels, and the reading was better than market expectations. The headline index figure jumped to a 5 month high of 39.1 in March from 34.9 in February, with improvements in the outlook for employment, output, orders and exports orders (a reading of 50 represents a neutral outlook, and below that negative).

There was also evidence that the “inventory recession” or “Honda effect” could be slowing down. Traditionally, output falls off much faster in a recession than demand as shops sell from stock in response to reduced consumer demand and cut factory orders more radically, until stocks once again come into balance with demand.

The Cips says that stocks of finished goods fell to the lowest level since the institute’s data series began in 1992.
Many official bodies, notably the Bank of England’s Monetary Policy Committee, treat the Cips surveys as reliable leading indicators of future developments in the economy, and the relatively upbeat mood in the most recent poll will reinforce the Bank’s belief that the range of measures taken so far – bank recapitalisations, interest rates cuts, quantitative easing and a fiscal boost of £20bn in the pre-Budget report – may begin to bear fruit in coming months, particularly through the depreciation of sterling. That, in turn, would suggest less need for a further fiscal boost in the Budget on 22 April.

The profitability of UK companies outside the North Sea oil sector also improved in the fourth quarter of 2008, says the Office for National Statistics, with manufacturing firms boosting their rate of return from 4.3 per cent to 8.5 per cent, quarter on quarter.

However, some voices were still urging caution. Howard Archer of Global Insight said: “It is important not to read too much into this one survey – particularly as it follows an extremely weak CBI industrial trends survey. It still points to sharply contracting activity and orders are continuing to fall, albeit at a reduced rate. There are signs in the survey that the weaker pound is helping exporters, but this will continue to be countered by weakened demand in key export markets”.

It seems a fake dawn is surrounding us and that we will not be out of the woods for a number of years yet.

It sounds nice but who is actually going to benefit? If I lend you £100,000 and charge you 1% interest you pay back £1,000, if I charge you half that, now 0.5% well you will owe me £500. Of course you save £500 but that is not a great deal of money and should not be the deciding factor whether you can pay for you mortgage or not, should it? The mainstream housing market will be indifferent to today’s interest rate cut.   It is not the cost of credit, it’s the availability of credit that is damaging the housing market.

Tracker mortgage owners will once again save more money however 46% of property owners own their house and therefore will not be directly affected.

People seeking to enter the market now will be faced with much higher rates of interest than those on old tracker mortgages, as lenders keep their margins much higher than they have in the past.  More importantly, they find themselves unable to find the size of deposit needed to obtain a mortgage.

Savers are of course affected, their money effectively sitting in the bank and possibly being eaten away by bank fees. Another question is raised too. Are tracker mortgage owners, now with more cash in their bank due to reduced interest rates supposed to start spending again? Shouldn’t they be more prudent this time round and pay off even more of their capital? Let’s hope that is the message.

On a more positive note, the signs are that long term bond rates are now being driven down.  This makes yields on real estate look ever better value and should fuel investor demand. The beneficiaries will once again be the equity-rich investor buyers who can benefit both from falling prices and the opportunity to gear up at advantageous rates.  If this opportunity is seized it could, arguably, bring the first stage in a top-down market recovery into view.

Mortgage Lending

Net lending, which strips out repayments and redemptions, had bounced back in December to £1.8bn, but has now returned to the levels seen in October and November despite large cuts to the Bank base rate, now at 0.5%, their lowest ever level.

New buyer numbers remained the same as in December, with 31,000 mortgages approved for house purchases which is up on November’s figure of 27,000 but far below January 2008 figure of 70,000.

Remortgaging has fallen since last autumn as fixed-rate mortgage holders find that the best deal is with their current banks variable deal. This has been particularly true of those with little equity in their homes.

In October, 72,000 remortgages were approved, this figure had fallen to 36,000 by December and in January it dropped to 34,000. The value of those loans dropped from £9.9bn in September to £4.3bn in January.

Buyer difficulty – It is the lack of mortgages offered for first time buyers, the 85% and above LTV which has continued to be reflected in the number of mortgages taken up. The best rates are those cash or equity rich with at least 40% deposit, in comparison you will pay approximately 5% above the base rate for any mortgage with a 10% LTV.

Falling house prices are also deterring some people from entering the market. This morning, Hometrack said prices in England and Wales had fallen by 0.8% in February, and other market surveys have also reported a continued drop in values.

Howard Archer, chief UK economist at IHS Global Insight, said: “The Bank of England reported that mortgage approvals remained mired near record low levels in January at a level consistent with markedly falling house prices. This defied expectations of a modest further rise in mortgage approvals from November’s record low.”

Meanwhile, the Bank’s figures for unsecured lending, through credit cards, personal loans and overdrafts show a £403m increase in net borrowing in January, which is higher than December’s figure of £271m. However, lending remains below the six-month average.

Archer said: “Consumer borrowing is extremely low by past norms and it is likely to be limited over the coming months by ongoing very tight lending conditions, as well as many people increasingly looking to rein in their borrowing.”

Additional figures from the Building Societies Association showed savers withdrew more than they paid in January, recording a net outflow of £390m. However this is not uncommon in the first part of the year.

“The withdrawal represents less than 4% of the total net receipts received by building societies in 2008,” said Coles. “It is not unusual for building societies to have a net withdrawal in January, as savers take money out of their accounts to pay for Christmas expenditure. Outflows have occurred in six Januaries out of the last 10.”

Coles admitted low interest rates had reduced the incentive to save, but said that despite this 1.2m accounts had been opened in 2008.

When do you think it will be easier to get a mortgage?

The UK government recently acquired a 70% share of RBS when they invested £20 billion in the bank. Understandably the public were outraged when the bank announced that they were considering paying over £1 billion in bonuses. RBS made huge losses during the financial year and had to be bailed out by the government. So the issue was raised why reward people for failure?

To put this into perspective the previous year’s bonus pool is estimated to be almost £2.5 billion, although the economy was very strong during this period. Some people deserve to be paid bonuses due to terms in their contracts or where they can prove their performance directly led to profit.

The problem is paying bankers discretionary bonuses, when the company has made substantial losses during the financial year.

RBS have now informed the public that they will only pay bonuses where they are contractually obliged, this equates to roughly £175 million in bonuses.

It appears that public and government pressure has forced RBS to do the right thing by the public. Banks that have accepted government support are under greater pressure to drastically lower this year’s employee bonus payments.

RBS are also restructuring future employee bonus payments and reviewing remuneration for bankers.

Do you think banks will pay more realistic bonuses in the future?