In a rising market, it is a generally accepted principle that the sooner someone is able to get on the housing ladder the better, but what about in a falling or unstable market? We would suggest that the answer is still as soon as possible, but let’s expand on that a little further.

One of the main concerns of those looking to buy a property is what might happen to the value of the property they are hoping to buy. Let’s face it; nobody wants to invest in such an expensive asset if it is going to continue to lose value. For months, the newspapers, television and even the radio have been full of reports of double figure falls in property values, and with estimates of further significant reductions expected throughout 2009 it would be very easy to conclude that it would be better to wait until values have bottomed out.

However, the media hype and doom-mongers hide the reality of the situation, as their view of the housing market concentrates solely on price, with no reference to activity. There is no doubt that the average fall in value of houses sold in the last year has been between 10% and 15%, but because the total number of sales has only been a tiny fraction of what can be considered normal market activity, it is questionable as to whether this can ever be considered a true reflection of the value of housing stock. Many will argue that the true value of a property is what any individual is prepared to pay for it at any given time, but this is only case if there is a seller prepared to sell at that price. I am quite happy to pay £1,000 for a Ferrari, but there is unlikely to be anyone prepared to sell me one at that price, and therefore it would be wrong to sale the value of a Ferrari is £1,000 simply on the basis or that being what I am prepared to pay for it. Conversely, those who say the value of a house is what the individual owner is prepared to sell it for are also mistaken, unless there is a buyer prepared to buy at that price. When buyers and sellers have widely different opinions of the value of a property, sales fail, and there is, in fact, no market.

Examining the reality of the current situation suggests that “no market”, or close to it is what we are faced with currently. There are plenty of properties on the market, but the majority of sales are limited to those who have to sell, whether as a result of repossession, relocation or family upset. Those who are in the position of wanting to sell, as opposed to having to sell, are still tending to price their properties at a level where buyers believe them to be expensive. An examination of property websites will show many properties which have been listed for a considerable period of time with little or no reduction in the asking price. This begs the question as to how long it will be before sellers become more realistic, and I would suggest that the most likely answer is that they will not. The majority of sellers continue to be employed, and in many cases are enjoying interest rates which are the lowest they have ever experienced. It therefore follows that if they can afford their mortgage, they will simply stay where they are rather than sell their property for less than they believe it to be worth, especially if in doing so they will eat into their equity.

Of course, there will always be those that are in a forced sale situation for whatever reason, and this is where the bargains can sometimes be found. There have been many reports in recent months of the growth in repossessions, and it has certainly been true that lenders such as Northern Rock have followed a fairly aggressive policy to towards those who have fallen into arrears. Whilst lenders are under a duty to obtain the best price for the property, this has to be within a reasonable time, and that often leads to properties becoming available at what is often referred to as “very realistic” prices. A significant number of repossessions have been from buy to let landlords who were unable to keep up with their mortgage payments when interest rates went up last year. However, as the government becomes ever more strict with lenders concerning residential repossessions, and as rental incomes continue to increase whilst interest rates fall, this source of bargain property is likely to be restricted.

The lack of bargain property in the market is currently balanced by a corresponding lack of those who are actually able to buy a property. Whilst mortgage interest rates have fallen substantially, the best deals are generally available only to those who have very substantial deposits or equity, and that is not something which can be said to be a characteristic of a typical first time buyer. Whilst the price of an average house might well have fallen to £160,000, that still means that the absolute minimum deposit required will be £16,000, and it will currently cost an average rate of 6.5% for the next five years at that level. With a deposit of £24,000, the typical rate would drop to around 5.2%, but it would take a deposit of £40,000 or more to secure the market leading rates of around 4%.

Therefore, “the market” is probably more accurately defined as consisting only of a small number of reasonably priced properties, being competed for by a small number of buyers who have large enough deposits.

It is our belief that whilst the current climate remains bleak, the supply of mortgage finance will increase before the supply of bargain properties does, and if that is the case, it can only lead to increased competition, and eventually, increased selling prices. On that basis, it must be better to buy now whilst you can pick and choose, and negotiate.

Of course, the opposing view is that the recession will deepen into a depression, and the ensuing availability of thousands of repossessed properties from those who lose their employment will force down prices even further. Whilst this is a possibility, we have to ask ourselves whether a government who has already invested billions of our money in the banking system, and has introduced revolutionary schemes to help those whose homes are at risk, are prepared to let this happen. Our view is that they are not.

The most likely answer is yes, probably, and if your current deal is due to end within the next six months you should be looking to sort out a new deal right now. Most mortgage lenders produce offers which are valid for six months, and if the lender chosen offers a free valuation, there is nothing to lose.

The reason we are so certain that rates are going to increase is down to the current turmoil in the financial markets, especially the situation surrounding Lehman Brothers in the states and HBOS here in the UK.

For a period, which started before Easter and didn’t end until the school holidays were into their second week, the UK mortgage market has been characterised by high rates. Those lenders who remained in the market, had the appetite to lend, and more importantly had funds to lend were being very cautious. No one wanted to have the best deal, as no one believed their administration could cope with being top of the table. As soon as a lender found themselves at the top of the table they would increase rates and another round of tit for tat would start again.

Lenders will explain that the reason rates were so high was that the cost of funds meant they could not afford to offer cheaper rates, and huge arrangement fees were an absolute necessity. In reality there was a large dose of profiteering, from those who suddenly found that economic conditions had done in the competition. So what changed?

Well, quite simply, some lenders decided that their market share had fallen far enough and wanted to be back at the top of the table. They got there by cutting rates, and soon the tit for tat merry-go-round started back the other way. As fixed mortgage rates came down, an element of trust started to return to the markets, and this was reflected in the cost of wholesale money. There was even talk of a return to happy days again.

Then HBOS, the biggest mortgage lender in the UK had to be rescued by Lloyds TSB, and it became a case of “trust, what trust”. The LIBOR rate, which reflects the cost at which banks can borrow money from each other, has jumped by around 0.25% in the last few days, and this is bound to be reflected in fixed rates in the near future.

In fact, we have just received the first notification email from lenders confirming that First Active will be increasing their 90% two year fixed rate with effect from midnight. Nationwide have also advised that their rates will be on the increase shortly.

The answer is, unsurprisingly both “yes” and “no”. Let us explain;

Self certification of income is perhaps one of the most misunderstood aspects of all where mortgages are concerned. Self certification does not mean that no income has to be stated, and neither does it mean that any income which is stated will be ignored; these were features of mortgage schemes known as “non status” mortgages, and have been unavailable for a number of years. Self certification is a process whereby the lender will assess the income an applicant stated on the application form in the normal way, but will not ask for proof of the amount. The lender knows that the reason the applicant is applying on a self certified basis is because they don’t have documents to prove what they earn, and therefore will not ask for them. Self certification can be a useful tool where an applicant’s true income differs from their provable or taxable income. Here is an example:

Fred Bloggs runs a small engineering firm which has been a limited company for the past ten years or so. Fred’s accountant has told him that the most tax efficient way to receive his income is to pay himself a small salary and take the rest of what he needs as dividends. Fred calculates that he needs £30,000 a year to live on and so pays himself a salary of £6,000 and takes dividends of £24,000. The company makes around £60,000 profit each year on which it pays corporation tax of £12,000 (20%) leaving £48,000 in the coffers from which dividends can be taken. As the profits of Fred’s company have been taxed already Fred’s accountant works out that Fred can receive approximately £32,000 in dividends without having any more tax to pay. However Fred only needs £24,000, and therefore his accountant transfers the balance to a Directors Loan Account in Fred’s name, creating a loan from Fred to his company. Fred can ask the company to pay him back whenever he wishes.

If Fred was to apply for a normal “full status” mortgage, it is likely that the lender would only allow him to count his basic salary, and some of his dividends as income, and this might not be enough to secure Fred the size of mortgage he wants. By applying for a self certified mortgage, Fred can quite properly say his earnings are £38,000 as that is the total of his income, even though he may not have drawn it all. Indeed, in some cases the accountant might advise Fred that he can increase his income by the value of some items which only reduce profits on paper, such as depreciation.

Obviously, by not seeking documentary evidence of income, the risk for the lender is higher than it would be for full status mortgages. This is often reflected in the interest rate to be charged which is often 1% higher, and the requirement for a larger deposit.

In contrast, “fast track” is where a lender offers the facility to “fast track” a mortgage application by dispensing with the need for documentary evidence of certain things such as income. This facility is generally offered when the lender feels that the credit score achieved by the applicant is sufficiently high for them to be able to dispense with the normal requirements whilst not increasing their risk. The lenders would like applicants to understand that the facility is offered solely to streamline and speed up the process, and not to provide an application facility for those who cannot prove their income. As a result most lenders who offer a fast track facility will randomly sample a percentage of such applications, and will ask for proof of income to be provided. Fast track mortgages should not be applied for by those for which there is no prospect of being able to supply documentary evidence of earnings within a reasonable timescale.

So why the confusion?

Most of the confusion is created by the lenders themselves, and their changing criteria over the years. Whilst the lenders might “like applicants to understand that the facility is offered solely to streamline and speed up the process”, a shortening of processing times is seen by many as simply a by-product, and not the real reason at all.

Prior to the statutory regulation of mortgages in October 2004, the terms self certified and fast track were almost interchangeable. Certainly, the likes of the Abbey and Halifax would advertise a “fast track” policy, but when their representatives came calling they would discuss their new “self certification” facility! Indeed Northern Rock, issued statements denying that they offered self certification, whilst all the time listing fast track cases as self certified on their internal systems! The simple truth was that most lenders wanted the extra market share which came with offering a self certification style product, and competition for market share was fierce.

Nowadays, and especially since the credit crunch took hold, lenders have been far more specific in what their schemes are. Those offering a fast track service are actively sampling a proportion and asking for evidence of income, and some, like the Woolwich are asking intermediaries to confirm that they have seen the evidence in all cases. It is this last point which demonstrates that a faster process is secondary to the real reason for offering fast track. After all, if evidence has to be produced for the broker, it might as well be sent to the lender anyway; the work has been done and the time spent. Except, there is no one at the lender to look at it!

Fast track is offered nowadays because it saves costs, and all other benefits are secondary. Lenders learned some time ago that when “computer says no” or even “computer says yes”, there is statistically a far greater chance that the computer has made the right decision than the human it has replaced. However, checking paperwork is still something which has to be done by a human, and therefore, if the number of pieces of paper can be reduced, so can the number of humans needed to check them.

The lenders would probably say that the savings they make allow them to offer cheaper and better products and keep fees down. In the current economic climate, I doubt there are many who would agree.

Well, that’s what it feels like at the sharp end.

Yesterday, the housing minister Caroline Flint announced a package of measures designed to rescue the UK’s failing housing market. Central to her proposals is a rent now buy later scheme designed to help families and first time buyers save for a deposit. She was concerned that the withdrawal of 100% loans from the market, and the vastly increased expense of 95% loans have resulted in a lack of first time buyers, even though reducing house prices should result in greater affordability.

The scheme, which I feel certain has already been referred to as “novel”, “unique” or even “courageous” by Whitehall mandarins, allows a family with an income of less than £60,000 a year the opportunity to rent a property at a discounted rate for a given period of time. Suggestions are that the discounts are likely to be at least 20% of the market rent, and at the end of the period the tenant will be given the opportunity to buy the property, or a share of the property using as a deposit the money saved as a result of the discount.

Flint said: “We are determined to continue to do everything possible to promote long-term stability and fairness in the housing market. The international credit crunch has created significant challenges not just for the UK housing market but in other parts of Europe and the US. However, the long-term need to provide more homes has not gone away. We have a growing and ageing population and will only see worsening affordability unless we increase housing supply.”

In addition, the Government also plans to introduce a system of local housing companies to allow councils and the private sector to work together to develop surplus land. A pilot scheme is to run in four areas, with additional assistance being provided under yet another scheme to enable 75,000 new homes to be built across those towns considered most in need. On top of this, additional funding is to be made available to enable the purchase of surplus housing stock from cash strapped developers for use as affordable homes.

Whilst the announcements have been well received by some, the general feeling is that all these scheme are nothing more than applying a sticking plaster to broken leg. Lembit Opik from the Liberal Democrats, was quoted as saying “Another day, another new affordable housing announcement. The government’s hot air will not hide the fact that 10% fewer shared ownership homes were provided last year than in 2006.”

Whilst we welcome any help which provides greater choice for new buyers, this scheme is simply a sound bite reaction to current difficulties and a further refusal to recognise the true problem. Until mortgage lenders can access funds to lend, and those which do have funds call a halt to the profiteering of recent months, house prices and their availability is likely to be a side issue. Let’s face it, even if house prices did drop by 20%, (the Land Registry says they are still increasing), first time buyers are hardly likely to rush into buying when the main lenders have increased mortgage costs by some 30%, and now require a substantial deposit as well.

The irony of the situation is that it looks as if our Government is returning well and truly to their Old Labour roots, and hoping we don’t notice. Whatever a person’s political views are, allowing someone to occupy a house owned by the council at a discounted rent seems awfully like the days before right to buy. The comparison becomes even spookier when it is realised that the whole “estate” is likely to have been bought by the council at a knock down price. This means that the clock could be turned back on efforts to integrate social housing with private, saying goodbye to the benefits that brings.

The above question has been asked on a number of occasions recently, especially as some house price surveys indicate the market is almost in freefall and others indicate that prices are actually rising.

A selection of the most recent figures available show that both the Halifax and Nationwide house price indexes showed a monthly drop in May of 2.4% and 2.5% respectively, leading to annual falls of 3.8% and 4.4% with both forecasting further falls. In contrast Prime Location reported a rise in prices of 0.4% giving an annual increase of 6.9%, and the Land Registry reported 0% movement in May with an annual increase of 1.8%

So why the difference? And more importantly, who is right?

To find out the answer to those questions, we need to examine how the data is gathered and identify how that might effect the results. In the case of Prime Location, and similar indexes such as those published by Rightmove, the data is based on asking prices rather than sold prices, and whilst they certainly give a feel for the mood of the market, we believe in this exercise, they should be ignored.

The Halifax and Nationwide indices are based on the sale of properties that they have granted mortgages on, and this is where we begin to see the reason for the difference.

Firstly, the data can be influenced by the number and type of customers applying for mortgages. For instance, if they have a particularly good deal for first time buyers, first time buyers are likely to make up a disproportionately large percentage of the data, which will then be overweight in terms of lower value starter homes typical of first purchases.

Secondly, virtually all property bought with the help of a mortgage will have been “valued for mortgage purposes”. This means that a valuer would have carried out a valuation, the sole purpose of which is to confirm to the lender that the value is correct. If the valuer makes a mistake, and it turns out that the house is worth less than the valuation, the lender could lose out. Therefore, when the media is full of predictions of a crash, the valuer is likely to take a much more conservative view, especially if the lender employing him has already said publicly that they expect house prices to drop by 9% this year! A self-fulfilling prophesy?

The Land Registry data is compiled from every transfer of ownership of registered land, regardless of whether there is a mortgage on the property or not, and the sample is therefore significantly larger. Whilst some of the data will have been influenced by the policies and practices of lenders and the valuers, the influence is much less with such a wide sample.

The above has, I hope, explained why there are differences between the various indices. As for who is right, that’s easy, it’s the Land Registry. It is just such a shame that many parts of the media continue to show a preference to bad news and scaremongering, rather than reporting the facts.

Buildloan, the mortgage packaging arm of Buildstore have announced improvements to one of their most popular self build mortgage schemes.

The scheme, which is run in association with The Mortgage Business (TMB) who themselves are part of the HBOS group, is a Self Certified Lifetime Tracker mortgage for self builders and renovators providing advance stage payment lending to £500,000. Previously the maximum loan was capped at £350,000.

The product is priced at 2.44% over the Bank of England base rate for the life of the mortgage, giving a current pay rate of 7.44%. An early repayment Charge is payable at 1% of the amount redeemed prior to the 30th September 2011. There is an arrangement fee of £995 for loans up to £350,000, which increases to £1,995 for loans between £350,001 and £500,000.

The Buildloan products have always had a welcome place in the market, being unique in providing funding when starting each stage of the build rather than at the completion of each stage. With lending of up to 95% of the cost of aquiring the land, and 95% of the cost of the build (in certain circumstances), the Buildloan/TMB product has been instrumental in allowing self building to become an option for many who otherwise wouldn’t have had the available cash flow.

Way back in time, those who thought they might want to buy their home would open an account at a building society, and start saving. After several years of saving, the account holder would apply to the same building society for a mortgage. The building society would judge the application using similar criteria as today, but with less reliance on information from others, and more reliance on the “in branch” interview. One of the biggest considerations would be how much the applicant had managed to save, and how they had conducted their savings account. If everything was considered to be acceptable, a mortgage might then have been offered.

The reason I say might have been offered, is simply due to the fact that the building society would be lending money it had taken in as deposits from savers. If insufficient deposits had been received, then regardless of how good an application was, no money could be lent out.

By the mid 1980’s, the industry saw the arrival of centralised lenders, many of whom were branches of overseas corporations. Adverts started appearing on TV for the likes of the Household Mortgage Corporation, and names such as Bear Stearns and GMAC (General Motors) were starting to be heard. These new centralised lenders were different, in that the money they lent was not money that had been received in as deposits, but money that had been borrowed from other banks and financial institutions. This period in time also saw the emergence of mortgage brokers, who provided cheap and efficient distribution for these new lenders, most of whom did not want to invest in large branch networks.

As time went by, many traditional lenders also saw the advantage of lending money that had been borrowed from other lenders, and so the practice spread. In some cases, the lender themselves would not want to actually administer the mortgages themselves, and so, every now and then, they would package up the mortgages they had granted, and would sell these onto another lender in a process called securitisation. The whole process worked very well and benefited many, as long as the quality of the mortgages which were sold on was accurately known and graded.

In the UK, we operate in a regulated market, and as such we should be able to be reasonably confident that all those who have been granted mortgages are able afford them and have the ability to keep up with the payments. Of course there will always be those who slip through the net, but for most lenders, accounts in serious arrears are often less than 1%. However, in the United States, the distribution of mortgages is far less regulated, and it has been possible for vast numbers of mortgages to be granted to those who wouldn’t qualify if they were in the UK.

Typically, the applicant would have been talked into taking a mortgage deal with a very attractive initial discount, ignoring the fact that as soon as the discount had ended, the applicant would not be able to afford the repayments. However, even this would not necessarily be a disaster if the mortgage holder was able to sell the property and repay the mortgage, and prices were rising very fast in parts of the US.

The problems started when it became clear that there were vast numbers of people who had mortgages they couldn’t afford, and the market started to become flooded with property being sold on a forced sale basis, meaning that the ever increasing property price rises suddenly reversed. As most of these mortgages had been securitised, it meant that the “structured investment vehicles” they had become was no longer worth what everyone thought they were.

Of course, financial institutions and markets being as they are, every Tom Dick and Harry had wanted a piece of the pie and there were many institutions who had invested in structured investment vehicles now faced some serious losses on their investment. The problem is that most institutions have had difficulty calculating their own losses, let alone being able to assess the losses suffered by their competitors, and have therefore been very reluctant indeed to lend money to each other; this is why the credit crunch as more properly referred to as the liquidity crisis.

For those lenders who had built their business on the back of being able to borrow the money to lend, this was a serious turn of events, most notably demonstrated by the difficulties suffered by Northern Rock. What has been less well publicised is the number of centralised lenders who have either gone into liquidation, or simply just shut up shop for the time being.

Whilst the clock has not quite gone back to the mid 1980’s, it is certainly true that those lenders with money to lend, are those who have also receive deposits, and that is why there are quite so many television adverts at the moment for savings. It has been said that many of the lenders who are able to grant loans are simply profiteering, and it is a hard charge to refute, when the likes of the Nationwide announce increased profits on the back of 40% less lending!

Will it get better? The general thinking in the industry is that there will be return of activity and an eventual loosening of some criteria, but this might take some time. There is almost unanimous agreement that there will never be a return to the days of being able to borrow 90% of a property’s value with bad credit and no proof of income, but that isn’t necessarily a bad thing. We will know that the market is starting to recover when we see the first lender introduce a 100% product that does not need a guarantor.

The Association of Mortgage Intermediaries yesterday published their Value of Mortgage Advice report in which they reveal that brokers could save consumers up to £1,830 every year.

The research for the report was conducted by independent financial services market research company NMG, who were tasked with examining the difference in value obtained by those using a broker to source the best mortgage deals, and those who went direct to lenders.

Chris Cummings, Director General of the AMI said “Intermediaries are able to identify the most suitable product for the consumer at a competitive price”. He further stated “Analysis of consumer attitudes shows they value this advice much higher than that provided by lenders, and in these difficult times it is more important than ever for consumers to access good financial advice”

Cummings adds: “Advisers know their clients and use this insight and their knowledge of the market to identify the most suitable and most price competitive products for the client. If the government wants to achieve its aim of more fixed rate mortgages, this will be done via intermediaries.”

It is thought that one of the reasons mortgage brokers offer such value is that they will look at the true cost of a particular deal, taking into account the effect of any charges. When consumers approach a lender direct, their decision as to which mortgage is best is often based on seeking the lowest headline rate, and with the lowest rates now attracting the highest arrangement fees, this can often prove to be an expensive mistake.

The Royal Institute of Chartered Surveyors (RICS) has released figures which suggest the number of sales could fall by as much as 40% this year, and have also forecast that house prices will fall by approximately 5% this year.

The figures seem to support the views of both us and other industry commentators, who believe talk of a 30% fall in house prices to be nothing more than scaremongering with little basis in fact. Indeed with interest rates forecast to remain level, and unemployment relatively stable, there does not appear to be huge scope for significant increases in arrears and repossessions.

There is a significant body of opinion that believes that homeowners will simply not accept that they have to effectively give their home away, and will sit tight and ride out the current difficulties. These latest figures from RICS seems to suggest this is exactly what is happening.

The Abbey have today announced the launch of a special three year fixed rate remortgage deal for those whose mortgage is less than 50% of the value of their home.

Priced at 5.78% (cost for comparison 7%), the fixed rate remortgage deal comes with a free valuation and free remortgage legal fees.

The scheme is only available through selected intermediaries, including the Mortgage Warehouse.

We hope this might prompt other lenders into reducing rates over the coming months.