Encouraging news from the US
Posted on 26 March 2009 by
Following the U.S. government’s plan push mortgage rates lower by increasing their purchases of mortgage backed securities as well as Treasury Bonds the traditional 30 year fixed mortgage rate fell today to 4.85%, the lowest on record, according to Freddie Mac’s weekly survey, which dates back to 1971
The steady fall in rates in recent weeks has resulted in U.S. mortgage applications rising for a third consecutive week as the lower rates encouraged both purchases and remortgaging, although nearly all of the increase was for remortgages.
Whilst this doesn’t have any direct effect on the UK market, any improvement in the US economy will help the rest of the world and our housing market will probably receive a psychological boost when the health of the U.S. housing market improves.
As far as our market is concerned my earlier expectation that UK house prices would stabilise by mid year now looks a little optimistic but, despite all the bad news there is encouraging anecdotal evidence of a significant pick up in buyer interest, including our own figures, and this news from the U.S. can only be helpful. I now think UK house prices will stabilise by the third quarter of this year but the recovery will be slow due to mortgage constraints.
Categories: Property market, Mortgages, House and home, Interest rates
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Tariq Juneja says:
Murray says:
Do we think that a similar reduction in our mortgage rates coming through now will lead to a spike in remortgage volumes in the UK?
Ray says:
Not this year or next. In fact I expect remortgage volumes in the UK in 2009 to be significantly lower than last year. The UK mortgage market is very different to the US.
Most borrowers in the US have 15 or 30 year fixed rates with no early repayment charges and the costs of remortgaging are quite small when amortised over 15 – 30 years. Hence it is a no brainer for anyone in the US who doesn’t plan to move in the near future (most of their mortgages are not portable), and whose status and LTV allows them to do so, to remortgage (or refinance to use the US term) even for a relatively small cut in their interest rate. This obviously provides a stimulus to the US economy as some of the reduced mortgage payments will be spent.
In the UK it is now often not worth remortgaging for anyone whose LTV is above 75% or 80% because of the big hike in mortgage rates for LTVs above these levels. With the steady fall in property values since mid 2007 increasing numbers of borrowers are finding themselves in this position and I would estimate that now close to half of borrowers would rule out remortgaging for this reason.
With many borrowers with major lenders reverting to a standard variable rate (SVR) between 2.5% and 3.5%, although many other SVRs are up to 6%, more borrowers than usual will choose to stay on SVR, at least in the short term. However, they need to bear in mind that when rates start rising they could easily rise quickly and a long way. Therefore although switching to a longish term fixed rate, say for 5-10 years, may mean accepting a rate higher than their SVR it will provide protection from future interest rate rises.
I expect a spike in remortgage volumes in a few years. This will happen when mortgage availability improves and property values increase.
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