Key factors dictating mortgage lenders ability to lend are risk, cost of borrowing and the regulatory framework. They are keen to demonstrate to their critics and the regulators that they are lending sensibly and responsibly once again. They are also keen to demonstrate to their shareholders that they are a safe bank and loans are provided only against adequate security.
The facts are:
- Lending secured against a perceived falling UK property market is considered risky.
- Cost of borrowing [for the lenders] is at an all time low with the 3-month LIBOR at 0.8875% (as at 7th of August 2009).
- Regulators dictate a disproportionate Capital Adequacy requirement in respect of lending provision.
So why do we find such difficulties in obtaining mainstream mortgage lending at comparative rates when compared to cost of borrowing?
One argument is that the lenders are taking in deposits from savers and funds from central banks to stockpile in their reserves to satisfy the Capital Adequacy requirements as laid down in the Basel II legislation.
Another is that there are so few ‘active’ lenders in the UK mortgage market, they can call the shots on pricing, and maintain artificially high profit margins on the loans being made to reduce the impact of possible future losses.
The truth would appear to be a bit of both. Detailed discussions with one mainstream lender, simplifies the issues.
It would appear that a lender lending £150,000 on a property worth £200,000 (at 75% loan to value) will have to keep circa £300,000 ‘in the bank’ to satisfy the requirements and yet it would seem, the same £150,000 loan on a property worth £167,000 (at 90% loan to value) will have to retain £600,000 ‘in the bank’ to satisfy the requirements.
In essence, the lender lending at 75% loan to value has to cover earnings on a total ‘commitment’ of £450,000, whereas, a lender lending at 90% has to cover earnings on £750,000 commitment using our example above, and the pricing of these products calculated accordingly.
Pressure on lending is still high as more buyers filter into the market. The predictions for rate rises over the next 24 to 36 months brings higher fixed rate mortgage costs with many continuing to rise throughout July.
Tracker margins have reduced slightly and are expected to continue to reduce but not as quickly as fixed rates are rising.
Choice of mortgage product is very much wide open but the lenders available still limited and suffering from poor service standards and delays in processing mortgage applications.
90% lending is still hard to obtain and remains at a high cost with many 90% products well into the late 6%'s. Higher deposits or levels of equity are still very much the order of the day.