Cracking under the strain

The pressure is mounting on housing as rates rise and sales fall, says Teresa Hunter.

HOMEBUYERS faced a new onslaught of unrelenting bad news last week as mortgage costs rose, negative equity soared, surveyors reported a further weakening of the housing market in May and the Governor of the Bank of England Mervyn King warned that many families face the worst period of financial turmoil in memory.

Building companies and banks also came under pressure as share prices tumbled. Many stretched builders now face the prospect of having to slash prices or leave developments unfinished until the market recovers.

The price of new-build property may slide further after moves to crack down on misleading sales propaganda. Some developments have paid huge cashbacks to buyers, yet the property has been registered at the full asking price, tricking other buyers into paying even more.

The Council of Mortgage Lenders is now demanding full disclosure of all sales incentives to prevent homes being registered for a significantly higher price than was paid.

A CML spokesman said: "We believe this practice has been widespread, and lenders are not happy and are demanding full disclosure of all incentives so the true value is transparent."

While falling new property prices may be good news for some buyers, they could trigger a flood of existing homeowners handing back their keys, as mortgages look increasingly unsustainable compared with the value of their homes.

Around 20,000 homebuyers who took out 100% mortgages over the past year could already be hit by negative equity, according to the CML. Some analysts predict we could see a million homes in negative equity if prices fall by 15%.

And there is little prospect of any reprieve as rigor mortis sets in. The Royal Institute of Chartered Surveyors said activity in the housing market in May was at the lowest ebb since 1978, with agents selling an average of five properties per month.

All of which is worrying against a background of increasing costs. Fixed rate loans soared again last week, after a surge in swap rates, which some commentators interpret as a sign that the market expects interest rates to rise three more times, by 0.75%, this year.

Others, though, believe raising rates would be suicidal for the economy with so many sectors facing sharp slowdowns. They predict that while immediate rate cuts look unlikely, the next move is down and borrowing costs could begin to fall again as soon as the autumn. That said, the Governor of the Bank of England, left, may be forced to write to Chancellor Alistair Darling next week after the latest consumer prices index figure is announced, if it exceeds 3%, as is expected. This will make it even harder for the bank to trim rates.

PSFM mortgage adviser John Postlethwaite says: "It has never been harder to call what will happen to mortgage costs next, as there are so many conflicting pressures. But nothing much will change until banks come back into the market and start cutting their margins and lending again.

"It would also help if the Bank of England's interest rate remit was widened so the Monetary Policy Committee could consider a broader range of factors when deciding the next direction of borrowing costs."

Charcol's Ray Boulger adds: "I don't believe rates will go up, although I think the rest of this year will be tough. Next year, I'm hoping, will be easier."

In the light of rising swap rates, on which fixed mortgages are priced, Darren Cook of Moneyfacts predicts that new loans will cost more than 7%.

He says: "The current average two-year fix is 6.68%. But with swap rates rising for two-year deals to 6.3%, lenders will charge between 7.3% and 8.3% once they have added their margin."

Some lenders have already hiked their mortgages. Royal Bank of Scotland last week increased its fixed range by an average 0.32%. Property buyers must now pay 5.99% with a £999 fee, and those looking to remortgage 6.19% with the same fee.

Elsewhere, Woolwich's 6.99% two-year fee-free loan increased to 7.29%, and from 6.69% to 6.99% with a fee.

As such, fixed deals may no longer look attractive when your current deal comes to an end, if your lender has a decent standard variable rate. Yet six out of 10 borrowers are now fixing their repayments, concerned about the stormy days ahead.

Fees for fixed loans have also soared. Before the credit crunch only 22 fixed mortgage deals charged application fees of more than £750, whereas 323 do so now. And the average fee has risen from £517 to £860.

If you are concerned that the price of fixed deals is now too high and believe rates will fall within the next two years, then one deal to consider might be the Lloyds TSB All Weather Tracker, available from brokers. This pegs rates at 5.99% but allows borrowers to switch to a fixed deal at a later stage. It has a £995 upfront fee.

Crunch is seventh heaven for savers
THE ongoing credit crunch is good news for savers, who can now lock into returns of 7% and higher.

Tomorrow Yorkshire Building Society launches a new two-year fixed rate savings bond paying 7%.

Similar deals are available from FirstSave, paying 7.1%, West Bromwich, paying 7.05%, Bradford & Bingley, Abbey, Icesave, ICICI Bank and Kaupthing Edge.

Yet savers suffer the same headache as borrowers in deciding whether to fix now, in case rates come down, or to hold on in the hope that there is better yet to come.

Kevin Mountford, head of savings at price comparison site moneysupermarket.com, says: "We have seen some fantastic fixed rate bonds pop up recently.

"While savers can now take advantage of several accounts offering over 7%, if you can hold on for a little while longer it might prove financially worthwhile. We can expect even better rates to trickle through if, as expected, the Bank of England raises interest rates again."

The Yorkshire's new account requires a low minimum deposit of just £100 and must be operated online.

Tanya Jackson at Yorkshire Building Society says: "There have been some significant movements in the money markets, which has enabled us to offer this fantastic interest rate to savers. Many fixed rate bonds are available for just one year, but this new bond ensures savers are guaranteed a great rate, and therefore peace of mind, for a longer period.

"The 7% rate is only available for a limited period and I would therefore urge savers to act quickly if they want get this market leading rate for their savings."

Cheshire Building Society has also launched a new two-year fixed bond paying 6.75% for deposits of more than £5,000, which can be operated by phone or online. The Skipton offers bonds paying 6.7% over two and three years, and 6.5% over one.