Expert mortgage views & facts

For both existing and potential homeowners worried about the market for mortgages and remortgages, the picture can be confusing. One day we hear that certain lenders have dropped their mortgage interest rates, the next day another lender has raised theirs – so what is actually happening?

Mortgage market: the facts
Lenders have experienced limitations on the availability of funds that they can make available for mortgages and other borrowing, and this has led them to tighten up their lending criteria, reducing potential losses from relaxed lending to people with poorer credit histories and making it more difficult to obtain credit (this situation has become known as the ‘credit crunch’).

For people who can get a mortgage, interest rates are mostly higher than before the credit crunch, making mortgages more expensive to repay.

This is of particular concern to existing homeowners: they now face paying significantly more each month. Those coming to the end of fixed-rate deals may find their previously affordable mortgage payments soon become much more expensive.

Homebuyers are also being required to pay higher deposits, with 100% mortgages all but a thing of the past. Lenders are also being more strict about affordability – with rates increasing, those on lower incomes are less likely to be offered a mortgage today.

But are all mortgages more expensive?
There is a mixed picture on this. It all depends on a) your own financial situation, and b) what you are comparing current interest rates with.

In recent terms, the price of mortgages is relatively high. Interest rates loosely follow the Bank of England base rate, and the base rate in 2008 (5.25% in February) has been at its highest since 2001.

But compare this to a decade ago – when the base rate was around 7-7.5%, or indeed the early 90s when the base rate was 10-15% - and you will see that historically, mortgages have been much more expensive.

The Bank of England lowered the base rate to 5% in April this year, in an attempt to encourage lower interest rates. However, many lenders have been reluctant to lower their interest rates due to the uncertain economy, and this uncertainty has even led to a few rises in interest rates.

Even where mortgage rates have fallen, that doesn’t avoid the recent sharp rise in initial mortgage fees. A report by Which? states that the average mortgage arrangement fee is now £936, up from £634 just 18 months previously. And Moneywise reported that some lenders are charging in excess of £2,500 for some mortgages.

Not all mortgages have these arrangement fees, but in most cases, the best mortgage rates are only achievable by paying the mortgage fees first.

What next for mortgages?
If the expected losses are not as big as feared, confidence could return and lenders may begin to trust homebuyers again, and may lower interest rates and mortgage arrangement fees, making mortgages less expensive.

If the losses are big, though, lenders will have no choice but to further restrict their lending until the market settles – and this probably means even higher interest rates and mortgage fees.

But external factors may play a part, too. According to The Guardian, inflation is at its highest since 1992. High inflation usually leads to the Bank of England raising its base rate, which would inevitably push up lenders’ interest rates. The Bank of England are resisting so far, as they know it would make mortgages even more expensive – but if inflation continues to rise, they may have little choice.