The Council of Mortgage Lenders (CML) has advised borrowers currently benefitting from record-low interest rates to overpay on their mortgages to protect themselves from falling house prices. Its advice came as the latest CML figures showed that mortgage lending had dropped to its lowest level since it started collecting monthly data in 2002. This is based on just 33,000 mortgages approved for home purchase in November 2008, down 59% on the corresponding month for the previous year. Indeed if December’s figures also make grim reading, the last three months are on course to be the quarter with the lowest number of mortgages since 1974 – the year that quarterly data was first published.
In addition to advising borrowers to overpay on their mortgages, the CML have also advised people on interest-only mortgages to consider moving to the repayment variety – at least whilst this all-time low rate of interest lasts. This advice comes ahead of what, the CML believe, to be tough times ahead. As well as suggesting that house prices have still some way to fall, they also predict negative net mortgage lending for 2009, i.e. more mortgage borrowing paid back than lent out. To quote Michael Coogan, the CML director general: “Limited mortgage funding and reduced consumer demand will weaken lending activity further in the coming months. The flow of funds to the mortgage market will not improve this year without further intervention from the government”. Action from the government is rumoured to be imminent with a reported £200bn cash injection to wipe out the banks so-called “toxic” debts.
The statistics show that property affordability has improved significantly in the last year or so with homes being at their most affordable since February 2007 for first-time buyers and April 2006 for home movers. The size of the average mortgage taken out by a first time buyer standing at £100,000 – compared to £116,500 just one year ago. However, the CML’s figures also tell us that the average first time buyer now has to save up an extra £6,350 for the deposit with the average deposit being £18,000 as opposed to £11,650 twelve months ago. Commenting on the situation, Michael Coogan said: “Affordability is improving for those who are able to access a mortgage, but saving for a deposit will still be a constraint for many would-be first-time buyers”.
There is little doubt that increasing your payments can significantly reduce the term of your mortgage and save thousands of pounds in interest. Using a mortgage of £100,000 as an example and taking an interest rate of 3% (a realistic current rate for a tracker) with monthly repayments of £500 it was calculated that with an overpayment of £200 per month (realistically what the payment would have been before the big interest rate cuts) the mortgage term would be reduced from 23 years to 14 years, 9 months. Even more significantly there would be a £14,540 saving in interest payments. The CML say that, on average, interest payments consume 18.2% of a first-time buyer’s income and 14.4% of a home-mover’s income.