The rise of mortgages, the fall of housing?

The mortgage market has always been a moveable feast and how it moves depends on a range of factors. For example, as well as interest rates and inflation, confidence in the housing market and the wider economy also have an impact on both the availability and pricing of mortgage products.

Even before the credit crunch in August, the winds of change were starting to blow on all these factors, nudging them into a different position. But now the true fall-out of the Northern Rock debacle is also starting to reveal itself, UK homeowners are left wondering what will be the overall effect on the mortgage and housing market.

Mortgage ups and downs

According to recent research from financial analysts, Moneyfacts, the last three months - that has constituted the 'fastest growing mortgage market' in history - is now suffering its biggest decline. Researcher, Julia Harris, said, "The mortgage market saw an extremely buoyant start to 2007, both in terms of the number of products to choose from - growing 22% in the first six months - but also as new lenders had recently entered the market and existing players explored new lending areas. However, since its peak in July, products have been flying off the shelves."

In fact there are now 40% fewer mortgage products available for consumers to choose from than there were this time three months ago. While most of this reduction can be attributed to the subprime and buy-to-let markets that have witnessed 72% and 54% falls respectively, there has also been a 16% fall in the number of prime residential mortgage products up for grabs.

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For example, on 4 October, troubled Northern Rock cut back its mortgage range from its previous 213 products down to just 70 as part of a wider response to its liquidity crisis. Several more mortgage products were also lost in the merger between Nationwide and Portman building societies which took place on 31 August. The remainder, says Harris, can only be attributed to many lenders making more minor changes to their ranges. "Some are withdrawing their higher risk products, for example those over 100% LTV, or their more specialist deals such as self-cert, while others are simply streamlining their ranges."

Even the mortgage products left have been effectively 'put on a diet'. For example, more conservative top loan limits have been applied while maximum Loan to Values have fallen. "Borrowers are also now less likely to find a subprime lender that will accept extra heavy or unlimited adverse credit," says Harris.

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Interest rate expectations

Another unusual twist of events in terms of mortgage pricing has been the change in expectation of interest rate movements. Just a few months ago, a further rise from base rates current level of 5.75% was almost imminent but since the credit crunch, commentators have been banking on a drop in rates instead. This has drawn more people back towards tracker mortgages, though fixes - having been clipped in price with falling swap rates in recent weeks - are still taking the majority stake.

Nicola Bright, head of a mortgage adviser team, at AWD Moneyextra says that the average split is currently 60% to 40% in favour of fixed rates. "Though there has been a return towards trackers, there will always be borrowers who are seeking out fixed rate deals as they simply need the security of payments the type of mortgage offers," she says.

One product that has bridged the gap is a deal from Woolwich that offers a fixed rate for the first year and tracker for the next two. "This product has sold well and its shows that borrowers, while wanting to shelter now, see rates falling in the longer term."

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22 October 2007 © Moneyextra.com

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