Property Crumble

5 year fixed rate mortgages have improved since we last tested the mortgage market one month ago.

The Woolwich has reduced its 5 year fix by 0.2% but is maintaining the 70% LTV (loan to value) ceiling.

In addition a number of new products have been launched into the market setting the median competitive rate at 5.49%, the same as the Woolwich, but at a slightly higher LTV of 75%.

The fact that the Newcastle has launched below 5% can be taken as a sign that banks are willing to squeeze margin to gain business, which is a sign of the mortgage market returning health rather than a rapid drop in 5 year interest rate forecasts.

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Alistair Darling UK Chancellor of Exchequor

If your monthly mortgage payments are hurting or you are worried how interest rates will rise in the next year or so, then spare a thought for the UK Chancellor of the Exchequer.

In the past month, according to the FT, the increase in 10 year gilt (UK Government bonds) yields has added an extra £7.5bn to his interest rate bill. And, if inflation raises its head, then this will only rise further.

Poor chap.

Review of 5 year fix deals conducted on 7th Oct 09

This is a selection of the best deals:

Halifax – only for existing borrowers and to 75% loan to value  (if a primary home – holiday homes get 55%)- and stepped increases. Assumes base rates to rise 1% Sept 10 and a further 0.5% in Spring.

Woolwich – for first time buyers and new customers, 5.69% for the length of the loan up to 70% (holiday homes only 50%).

So, holiday homes are toast – they must now be discounted by 20% against an equivalent property in a centre of employment.

Existing borrowers get favourable deals – first time buyers get much worse – this will, over time,  reduce the number of property owners and therefore we can assume that current supply is adequate for the reducing demand.

Base rates will be around 4% within 18 to 24 months. Assuming the spread between the base rate and the mortgage rate of about 150 bps (basis points). Normally, the spread is around 100, but we will assume this will widen as the level of competition in the mortgage market will have reduced sharply.

Property prices are, therefore, going to crumble and there is a short selling window now available.

Okay, it is beginning – the beginning of the end of the bankers honeymoon.

Since Lehman, Governments have bent over backwards to keep banks in business, but now the rules for the recovery are being laid down – banks will need to hold more cash (ie your and my deposits or government bonds) and depend less on each other for interbank lending.

The UK rules will be brought in sometime next year and probably followed by other G20 nations – allowing for an anemic recovery to proceed it – but this will slowly turn the credit tap off.

It will raise the interest you and I earn on deposit and raise the cost of 3 to 5 year fixed mortgages. This will draw savers money into bank deposits and away from stock markets and property whilst raising the cost of property at the same time (without actually raising base rates).

This change is overdue, but will have the same effect, slowly subsiding property prices. Better to sell your property, bank the money on 6 month of 60 day notice deposits so you can take advantage of the rising deposit rates to come.