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The Nationwide Building Society, One of  Britain’s biggest building societys, have become the first mortgage lender to re-introduce mortgages worth up to 95% of a property’s value.

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Fixed rate mortgages now have a market share of 69% of all residential mortgages in the UK, compared to just 51% in 2007.

Despite a massive 2.61 % drop in the two year swap rate between 1 October and today, the average two year fixed rate mortgage has only dropped by 0.71 %.

The profit margin lenders are charging continues to grow. This time last year the gap was 1.12 % between the cost of the swap rate and lending rate now today it is 2.92 %.

Commenting, Michelle Slade, analyst at Moneyfacts.co.uk, said: “By not reintroducing cheaper tracker mortgages to the market, the lenders are leaving borrowers with little option but to go on to more expensive fixed rate mortgages.

“It is evident that lenders are continuing to increase their margins, despite a fall in the cost of funding.

“Borrowers expect to pay a slightly increased price to fix their mortgage repayments compared to tracker deals. However, today the gap between the average two year fixed and tracker mortgage stands at 1.16%, compared to just 0.14% this time last year.

“It would appear that all lenders are adopting a similar approach, despite calls from the Government to pass on cuts to borrowers.”

The recession will lead to a huge rise in Mortgage arrears among borrowers in 2009.

The Council of Mortgage Lenders said the number of houses more than three months in arrears with their repayments could reach 500,000.

That’s over 100% rise in expected figure of 210,000 for this year.

The CML said 2009 would be “very tough” because the recession would drive up unemployment and lead to 75,000 repossessions among borrowers.

“The economic recession means unemployment is rising sharply, and this will inevitably impact on the number of households facing mortgage arrears,” it said.

Michael Coogan, head of the Council of Mortgage Lenders, blames unemployment and debt

The credit crunch over the past 18 months, which has seen some of the UK’s biggest lenders collapse or be taken over, has led to an unprecedented lack of funds for home buyers.

The latest figures show that gross mortgage lending in November this year fell by another 22% from October, to just under £15bn - which was 51% lower than in the same month last year.

With house prices still falling fast the CML has refused to make a formal house price forecast for 2009, describing the idea recently as “futile”.

But it predicts that sales next year will continue falling to just 700,000; from 900,000 this year and 1.6 million in 2007.

The housing market would remain “extremely subdued” said the CML’s director general Michael Coogan, who predicted that new mortgage lending would be so low that it would be outstripped by people paying off their mortgages.

“Recent glimmers of light in terms of government intervention to improve conditions to support new lending are helpful, but more will be needed,” he added.

The CML pointed out that existing borrowers on SVR rates would see their repayments cut because of the recent reductions in interest rates.

But it said the housing market was bearing the brunt of the credit crunch and despite what it called “seismic shifts” in government economic policy to deal with the situation, the market would not start to recover until the second half of 2009 at the earliest.

One reason for the expected sharp rise in arrears is that lenders will hold off from repossessing some borrowers who are struggling, under pressure from the government and with help from the various recently launched mortgage assistance schemes.

And the CML claims that not all the eventual repossessions will involve homeowners being evicted from their properties.

“A significant number of these are likely to be cases where the property is abandoned or where property fraud has been perpetrated, and a sizeable share are expected to be buy-to-let mortgages,” it said.

The U.S. Federal Reserve shocked the world last night by slashing its interest rate close to 0% and declared they  would pump huge amounts of cash to businesses and consumers in a bid to beat of the recession.

The  official rate to between zero and 0.25 per cent was set by the Central Bank. Analysts beleive the move could be adopted within months by the Bank of England.

Former prime minister Sir John Major has called on the Government to give savers a tax break on the first £5,000 of income from their nest eggs to help them through the recession.

He said that such an exemption, which could be worth £2,000 a year to middle income households, would be ’socially just’.

The possibility of 0% interest rates in Britain looked even more likely yesterday after official figures revealed another drop in inflation.

The Office for National Statistics said it fell from 5.2 per cent in September to 4.1 per cent in November  the biggest two month drop since the last recession 16 years ago.

The drop is largely being driven by falling fuel prices, with drivers finally getting a cheaper deal at the pumps.

Jonathan Loynes, chief economist at the Capital Economics consultancy, said: ‘It seems clear that the inflation outlook presents no obstacle to further cuts in interest rates.’

Yesterday Mervyn King, the Bank of England’s governor, said it was ‘quite possible’
that inflation will fall below one per cent next year. He was forced to send a letter to the Chancellor to explain why inflation is currently so far above the Government’s target of two per cent.

Many economists are even predicting that inflation will fall below zero next year  -  a phenomenon known as ‘deflation’  -  for the first time since 1960.

Michael Saunders, head of European economics at the investment bank Citigroup, said: ‘The UK recession is likely to be so severe that inflation will fall sharply further in the year ahead.

‘CPI inflation is likely to briefly fall to zero, or even turn slightly negative, in late 2009.’

Such delicate economic conditions will mean that central banks have to keep a close eye on interest rates.

U.S. Treasury Secretary Henry Paulson said he does not expect any more major financial institutions to fail during the current credit crisis.

Paulson also said he has no current plans to ask Congress to make the second half of the $700 billion financial rescue fund available before the Bush administration leaves office on January 20.

But he added the administration was prepared to move quickly, if necessary, to tap the extra resources.

In an interview on CNBC television, Paulson said he believes the actions taken by financial authorities in the United States and other countries will allow all the systemically important institutions to remain viable.
 

While this could help stimulate the British economy, it would be dire news for the nation’s savers - who outnumber borrowers by seven to one.

But there was good news for Britons heading across the Atlantic - the pound leapt against the dollar, rising almost 10 cents to $1.57.

British interest rates currently stand at 2 per cent, but Roger Bootle, adviser to the accountants Deloitte, said the Bank of England must cut them ‘as far as it can’.

He said: ‘It won’t be long before interest rates are reduced to one per cent, and they may ultimately have to fall all the way to zero.’

Last night’s move represents an extraordinary throw of the dice by the Fed’s chairman Ben Bernanke.

He has been aggressively reducing rates from a high of  5.25 per cent in September last year to one per cent before yesterday’s move.

Experts - who had been expected a 0.5 per cent cut - were taken aback by the drastic 0.75 per cent cut.

Mr Bernanke and his colleagues pledged to use ‘all available tools’ as they struggle to contain the worst financial crisis since the 1930s.

Interest rates are likely to remain at historic lows for some time to come, Mr Bernanke added, with the Fed taking steps to pump new money into the economy.

These moves could put billions of welcome and unexpected dollars into the pockets of struggling US consumers at a time when a recession has hit their appetite for spending.

The Fed is now printing money in vast new quantities. Since September, the U.S. central bank’s balance sheet has ballooned from about $900 billion to more than $2 trillion as it has created money and lent it out.

As soon as the Fed completes its plans to buy mortgage-backed debt and consumer debt, the balance sheet will be up to about $3 trillion.

‘At some point, and without knowing the timing, the Fed is going to have to destroy all that money it is creating,” Alan Blinder, a professor of economics at Princeton and a former vice chairman of the Federal Reserve, told the New York Times.

‘Right now, the crisis is created by the huge demand by banks for hoarding cash. The Fed is providing cash, and the banks want to hoard it. When things start returning to normal, the banks will want to start lending it out. If that much money is left in the monetary base, it would be extremely inflationary.’

James Hughes, market analyst at CMC Markets, called last night’s decision a ‘pre-Christmas extravaganza’.

‘This clearly hadn’t been priced into markets with the dollar tumbling as a result,’ he said.

But despite relief against the dollar, holidaymakers to Europe face no respite as the pound fell to a new all-time low below 1.11 euros overnight.

The announcement sparked a rally on Wall Street and the Dow Jones index closed 359 points up - a 4 per cent rise.

This morning Asian stocks were rising on the news. In Tokyo, the Nikkei 225 stock average rose 44.50 points, or 0.5 per cent, to 8,612.52 after initially rising 1.1 per cent. Hong Kong’s Hang Seng Index rose 1.5 per cent to 15,361.58.

South Korea’s Kospi added 0.7 per cent to 1,169.75, while benchmarks in mainland China, Singapore, Thailand and Australia also gained.

Andrew Hagger of the financial information website Moneynet said savings rates have already been slashed in recent months.

‘Many accounts are now offering an almost worthless rate of return,’ he said.

‘Savers relying on a monthly return to boost their income are feeling the brunt of recent base rate cuts.’

More than one in eight variable rate savings accounts pays an interest rate of 0.3 per cent or less. If you had £50,000 in a savings account paying this measly rate, you would earn just £10 per month after tax.

There are fears that pensioners could be most affected by any further rate cuts as many rely on income from their savings to boost their meagre pensions.

Gordon Lishman, director general of the charity Age Concern, said the current economic climate is ‘hitting many pensioners very hard’.

He added: ‘More than half have felt forced into cutting back on essentials in recent months.’

Abbey, Britains second biggest mortgage lender will introduce a harder affordability test for new mortgage customers from tomorrow.

The lender is increasing the interest rate that it uses to work out the affordability to new borrowers. Abbey will now raise the interest rate and base  its calculations on a new higher rate of 7 %.

Most lenders use their standard variable rate as a basis to calculate whether someone can afford monthly mortgage repayments.

However, SVRs have fallen sharply in the last two months after lenders were put under heavy political pressure to pass on the Bank of England base rate cut to borrowers on variable-rate deals. Abbey’s SVR is currently 5.44 per cent.

The lender will also use only a capital repayment mortgage as the basis for its calculations, rather than interest-only, which would make monthly repayments cheaper.

Aaron Strutt, of Chase De Vere Mortgage Management, a broker, said: “Abbey are clearly predicting that when people come off their two- or three-year deals their SVR is going to be as high as 7 per cent. However new customers taking out a mortgage now may think it unfair that the rate being used is far higher than the current SVR or the base rate”.

Lenders are scrutinising mortgage applications even more and the credit histories of new customers. Some borrowers are  being rejected for being overdrawn on their current account or missing a mobile payment on their phone.

Melanie Bien, director of Savills Private Finance, another broker, said: “There is a danger that lenders become too cautious, penalising all borrowers for some of the lax lending policies of the past.

“Applications really should be assessed on a case-by-case basis to ensure that prime borrowers are not penalised for problems others have had in paying their mortgage in the past.”

Abbey came under fire earlier this week for writing to some borrowers on flexible mortgages, warning them of a clause in their contract which could force them to pay back a lump sum if their home falls too far in value.

Flexible mortgage customers can extend the amount of money they have borrowed against their home, up to 90 per cent of the property’s value.

However, Abbey has warned borrowers that if the value of their home continues to fall, pushing up their loan-to-value (LTV) ratio beyond 90 per cent, households may be forced to stump up a lump sum to ensure it is reduced back to below 90 per cent.

A spokesperson for Abbey said: “We have not invoked this particular clause and have no intention to. What we would say is that in a falling house price environment it is prudent for people on flexible deals who find themselves at over 90 per cent LTV to look at whether they can afford to make any overpayments.”

Would be house buyers are  desperate not to miss out on the housing market bottoming out, claims London estate agent Cluttons.

The estate agent is predicting that house prices will drop by around 25% from their August 2007 peak by early 2009, with the market bottoming out from then.They forecast that many home owners who have built up equity in their homes over the last ten years are getting ready to start purchasing new homes at rock bottom prices.

The same goes for buyers who have had to rent over the last 12 months.

Richard Cotton, divisional head of residential agency at Cluttons, states “While 2009 will undoubtedly be another turbulent year for London’s property market, I believe we are approaching a turning point in terms of price falls.

“There are lots of buyers watching the residential market very closely, and they are desperate not to miss the floor when it arrives.”

Cotton says that over the last month sellers are becoming more realistic with prices they are putting their houses up for sale at.

He adds: “There are fantastic opportunities to be had and this will pave the way for the return of the investor in early 2009.

“This is particularly true of multiple buy-to-let landlords with equity in their portfolios, who want to take advantage of low prices and cheaper mortgages as a result of their strong equity position.”

Cotton also beleives there will be  a drop in demand for rental properties.

He says rents will drop in line with oversupply, but landlords will benefit from high yields as rental income relative to property prices continues to strengthen.

Homeowners with a tracker rate mortgage are being forced to pay on average an extra £2,000 a year on their mortgage, official figures announced yesterday showed.

The difference between the Bank of England’s base rate and the interest rate which lenders charge has never been higher since records began in 1997.

Less than a year ago banks and building societies were charging on average BBR  plus 0.94 %.

But the latest figures announced that  the Bank of England, show the average tracker rate is now the BBR plus 2.84 %.

With an average loan of £150,000, this adds £165 a month, or nearly £2,000 a year, onto their mortgage.

Michael Saunders, head of European economics at the investment bank Citigroup, said the benefit for families of the Bank slashing rates ‘remains quite limited’.

The Bank has reduced  rates three times in three months, droppng from five per cent to two per cent, and it is predicted that rates will drop even more.

Three million mortgage borrowers have a tracker deal. Latest figures show a record 35 % of people buying a home or remortgaging took one out.

This type of mortgage deal is so attractive at the current time because the interest rate falls with the Bank’s base rate.

But the real winners are homeowners who took out a tracker at least a year ago when lenders were still offering extremely generous terms.

House prices falling and lower interest rates are starting to tempt potential buyers back into the UK property market.

The amount of people looking around for  a new home increased for the first time in two years during November, according to the Royal Institution of Chartered Surveyors (RICS).

The rise in numbers of interested  buyers was accompanied by expectations that the probability of sales levels will pick up in the next few months, while the number of surveyors reporting house prices levelling out also eased slightly during the month. The figures caused some economists to suggest falling activity levels may now be bottoming out.

Allan Monks, of JPMorgan Chase Bank, said: “Though there have been few positives to take from the housing market data for some time, the RICS survey in November gave some hope that house purchase activity has finally troughed, and that the most intense phase of the downward price spiral is behind us.”

He said the RICS figures suggested that mortgage approvals could now begin rising by between 2,000 to 3,000 a month. He added that although the continued low level of both sales and the number of homes estate agents had on their books pointed to further price falls, the figures hinted at a possible moderation in those declines in a few months’ time.

But despite reasons for optimism looking forward, the current state of the housing market remains gloomy, with the number of homes changing hands sinking to a new record low.

The average chartered surveyor estate agents sold only 10.6 properties during the three months to the end of November, down slightly from 10.9 during the previous three-month period.

At the same time figures from Communities and Local Government showed that the rate at which house prices are falling accelerated during October. The annual rate of decline increased to 7.4% during the year to the end of October, compared with a year-on-year drop of 5.1% in September.

Homes lost a further 2.5% of their value during October itself, to leave the average UK property costing £203,539.

Seema Shah, property economist at Capital Economics, said: “Sharp interest rate cuts, coupled with the growing acceptance amongst sellers that they need to lower asking prices significantly in order to achieve a sale, appear to have sparked new buyer interest.”

Northern Rock has snubbed the government and only passed on half of last week’s 1% base rate cut  to its standard variable rate (SVR) mortgage borrowers.  

The government owned bank  decision was to cut its SVR to 5.34% . Northern Rock passed on the full 1.5% cut in the base rate to mortgage borrowers last month. 

Some borrowers who were locked in to Northern Rock’s SVR were starting to struggle before last month’s Bank of England base rate cut, said Aaron Strutt of Chase De Vere Mortgage Management.

‘The SVR is now cheaper than a lot of rates they were paying anyway - it has been a real saver for them,’ said Strutt, product manager with the London-based firm of mortgage brokers. Northern Rock’s decision to pass on just half the full base rate cut was more than many banks and building societies had, he added.

Cheltenham & Gloucester has lowered the cost of its tracker rate mortgage deals with a new portfollio of All Weather mortgages, launching tomorrow. The lowest rate on offer is Lloyds TSB-owned lender was a 3.69% (or 1.69% above the base rate) two-year tracker deal with a 2.5% fee for borrowers with a 25% deposit.  

Strutt said the C&G’s All Weather deal, which lets borrowers switch from a tracker to a fixed-rate deal with no penalty, was a good option for home owners looking to lock-in on low interest rates.  �

With the drop in interst rates on Thursday the new 3 month LIBOR rate has fallen to 3.37%.

The LIBOR rate was announced by the British Bankers’ Association on Friday and it needed to come down for there to be any chance of lenders reducing the rates on new mortgage products.

In the wake of the 1.5% base rate cut last month 3-month LIBOR fell by a whopping 1% to 4.49%, but this meant that LIBOR was still 1.5% above base.

With it now 1.37% over base the industry will now be hoping that 3-month LIBOR sees further falls over the next few weeks.