Assetsure News 26th August 2008

Huge Drop in Mortgage Approvals

The number of the approved mortgages for UK property purchases in July was almost two thirds lower than the same time last year, recent figures show. Just 20,448 mortgages were approved during the month which represents 65% drop in July 2007. The British bankers Association also announced that net mortgage lending, which takes out the impact of redemptions and repayments was £4.3 billion. David Dooks the BBA's statistical director said: "The monthly numbers of approvals for house purchase, which have fallen by some two-thirds over the last year, levelled off in July...'It would, however, be premature to think that the housing market will now start to recover because overall approval activity continues to be very low." The BBA figures were supplemented by the Council of mortgage lenders which also revealed that buy to let mortgage approvals dropped in the first half of 2008, for the very first time in three years.

Consumers seem determined to lower their credit card exposure in light of continuing bad news on the future state of the economy and possible redundancies ahead. Gross credit card borrowing actually fell to £7.4 billion during the month of July indicating consumers are worried and concerned about the future. During the same month savings are all UK consumers dropped by over 60% indicating that households are having to use up spare cash to pay for an increasingly expensive monthly set of outgoings. David Dooks again:'The pressures on household budgets are reflected in the relatively weak rise in individuals’ deposits and with consumer borrowing growing only slowly it seems that consumers are acting prudently."

Existing mortgage holders are feeling the pinch with the number of people struggling to meet their mortgage payments increasing. In addition, other first-time buyers have simply struggled to meet the lending criteria laid down by mortgage lenders who seem determined to pass up any applicants with a bad credit history or a low deposit. Is mortgage lenders 25% deposit before approving a new mortgage. People buying an average priced house in England and Wales of £180,781 now need a deposit of around £37,000 to get a competitive mortgage rate – nearly double the amount needed last year, according to mortgage firm mform.co.uk. It also shows that best-buy mortgages now require an average deposit of 20.75%, up from 11.75% in August last year. Popular two-year fixed rate deals have seen the biggest jump in the deposit required – from just 10 per cent 12 months ago to 23 per cent today.

With the historical high property prices, this level of deposit makes it almost impossible to first-time buyers to save up for a deposit. To make matters worse first-time buyers are well aware that it is a falling market and have no intention of jumping on the housing ladder when they know that even cheaper bargains are just around the corner. Francis Ghiloni, marketing and business development director at mform.co.uk, said: “There are still competitive deals and lenders willing to offer 95 per cent loans, but the most competitive offers are being restricted to people with big deposits or substantial equity... “First-time buyers or those who have entered the property market recently will struggle to qualify for the most competitive rates.”

The mortgage approval process will become even more stricter, from September 1 anyone buying a new build property including a block of flats conversion will be asked on the application form about any incentive they have received. The role is being introduced by Council of mortgage lenders to make applications transparent and reduce risks of money laundering.'Lenders have been becoming increasing concerned over the incentives being offered buy new build developers and companies. Mortgage lenders want to know the ins and outs of the deal before they lend their money,' explained Lynsey Sweales, Director of The Money Centre, one of the UK's largest independent buy-to-let mortgage brokers. The purpose of the change is to tighten up on applicants suitability and reduce the risk of lenders paying for high new build prices with large discounts attached. How these discounts have been distributed is a grey area and one which may be subject to exploitation in the past. This is not good news for blocks of flats developers who are all be struggling to sell empty properties across the UK which demand has collapsed for in light of landlord speculators leaving the market.

The buy to let mortgage market continues to influence the structure of the mortgage market. Leading players such as Bradford and Bingley are forced to raise additional equity from shareholders to support a £400 million emergency capital finance project. These types of smaller lenders are highly reliant on wholesale mortgage markets to finance their buy to let and commercial property loans to speculators and investors. It is possible that future takeovers and mergers will occur as a result of smaller lenders struggling to sustain profitability and shareholder value. New buy-to-let loans fell to 144,600 in the first half of 2008, an 18% dip compared with the previous six months, and the first fall for three years. For landlords taking a medium and long-term view, however there does seem to be some light at the end of the tunnel.

The Council of mortgage lenders had recently commented that rents are unlikely to fall as demand for homes to let remains high.'We expect the rental market to remain underpinned by strong demand, partly because some people who would like to buy a home are being forced to carry on renting for now," said CML director general Michael Coogan. The falls in buy to let mortgage approvals have not been asleep as the wider mortgage market indicating that investor confidence although severely battered has not completely evaporated. For amateur landlords who bought off plan in city centre converted apartment blocks, around 18 months ago, there are notable problems. Many have found themselves in negative equity where rents are not covering the increasingly expensive mortgage costs. This has caused a very minor rise in the number of landlord properties being repossessed in the first six months of the year.

The intermediary mortgage market is also under scrutiny by the FSA which has been planning a number of mortgage brokers recently for fraudulent mortgage applications. The pressure on brokers has led some unscrupulous characters to force a five applications regarding applicants income in order to secure the mortgage approval. The FSA, said recently that it was also concerned about lenders to give mortgages on inflated valuations on newly built city centre blocks of flats. Meanwhile, yet another credit crunch house builder victim, Bovis homes has also announced an 80% fall in pre-tax profits, due to the collapse in demand for new builds from all sectors of the housing market. Over the last decade UK property prices have tripled in value and yet in the last year alone they have fallen by 10% as a result of the credit crunch. Bank of England Deputy Governor Charles Bean said last week that the credit crisis will ``drag on for some considerable time.''