Property is viewed as excellent security, and as a result banks will lend investors money to purchase a property investment. You do not need to find 100% of the property value as an investment. You only need to find a proportion of the value in order to be able to purchase. However, although you invest just a portion of the funds you will actually receive capital growth on 100% of the asset.

Imagine you own a buy to let property portfolio with a value of £500,000. You will put down a deposit (say 20%) and you borrow the balance (£400,000) from the bank.

Typically since the War house prices have doubled every 9 years. If you assume this trend continues, then after 9 years your property value would have increased to £1 million. If you had an interest only mortgage your loan would still be £400,000. Your initial net worth (assets less debt) was £100,000, but 9 years later your net worth has increased to £600,000. Your net worth has increased by 6 times even though the value of the property has only doubled.

This is because you get 100% of the benefit of the increase in value. You put down only a percentage of the property value and borrowed the rest. However, the lender does not ask for a share of the increase, even though they financed a huge chunk of the property purchase.

The Bank of England cut the base rate yesterday to 0.5%, reaching yet another all time low. .

This is good news for those on a base rate tracker mortgage. But for those (particularly the elderly) who rely on their savings it has brought more hardship. Savers have seen the value of their income depleted over the past year. The government have been encouraged to introduce measures to help those who rely on savings for their income. Although the government have said the pans are to be introduced there is as yet no suggestion as to what form this help will take.

In an effort to stimulate demand the Bank of England is to now introduce “quantitative easing” i.e. creating new money. The initial new tranche of funds will be £75 billion, but the full amount could reach £150b.

It is hoped that the new funding being made available to banks and building societies will then encourage them to lend more in turn.

If you want an explanation of how quantitative easing will boost the economy there is a very good short video from the Financial Times explaining how it all works.

See http://tinyurl.com/cyebhb

The Financial Times has today reported that as a result of new capital available to the banks it is expected that there will be some new fixed rate mortgages with extremely attractive rates.

Two of the state-backed banks, Northern Rock and Royal Bank of Scotland, have promised to lend billions of pounds worth of new mortgages this year

Two-year fixed rates are already at their lowest level for six years. The FT states that brokers have warned that opting for a cheaper two-year fixed rate could be risky, as borrowers who do so may need to switch to another deal just as rates become more expensive.

For mortgage advice see www.marywaringmortgageadvice.co.uk

Amidst the bad news, at last something positive.

Although mortgage interest rates are currently low, there is a real shortage of funds and a lack of desire by banks to lend to one another.

As a result banks have not wished to be overly competitive. They do not have enough money to get all the business they may want, and therefore instead have been very specific with the criteria on which they will lend.

If you have more business being offered to you than you can accept it means that anything which falls outside the criteria even slightly will be rejected.

A chunk of the additional funds being made available to Northern Rock will be to introduce some new 90% loan to value products. At this end of the market there are limited lenders. This has kept rates very high, since no lender wants to reduce their rate through fear of being swamped with business.

Even just one additional lender entering this market could be enough to give a boost.

An additional £14billion has been made available from the government to Northern Rock in order to help revive the housing market. £5b of the fund will be available for spending in 2009. The remaining £9b will be available in 2010.

This has followed a period during which Northern Rock has repaid £18b of its £27b government loan. The repayment has been achieved  by actively seeking mortgage redemptions when rates end.

The old mortgage book will be split from its new business with the worst part being put into a separate vehicle. It is expected this will be managed alongside the book of nationalised Bradford & Bingley,

The bank will now start to focus on new lending & particularly to first time buyers looking for a 90% loan.

The Government earlier this week set out a package to inject £100 billion into the banking sector.

The problem up to now has been the lack of desire for banks to lend to one another. This in turn has caused a severe lack of available funds from lenders, making mortgage finance very limited. To deal with this banks have therefore been extremely choosy has to who they lent money to, and have tended to lend only to the safest of borrowers, i.e. those with a significant deposit. This has made it very difficult for others to have access to funds at anything like a reasonable rate.

This latest bail out by the Government should improve the amount of funds available. The government has also made banks promise to increase the amount of lending they are doing.

Will it work?

At this stage the details of the available funding are too limited to be able to assess the impact with any certainty.  But it is the next step in trying to cause the problems that lack of liquidity has caused.

Base rates have fallen from 5% in October 2008 to 1.5% now. Mortgage rates have also fallen- not by as much but still by a significant amount. This does mean that monthly repayments on your prospective home loan have been slashed dramatically in the past few months. Therefore if you are looking for a loan today you will be able to get that loan at a much lower rate than if you were looking in Autumn,

However, the downside is that due to the uncertainty in the market lenders are requiring much bigger deposits than was previously necessary.

The Financial Times has reported that 60% of all deals now require a deposit of at least 25%.  And 25% of all deals, those with the most attractive interest rates, now require a massive 40% down payment.

Therefore whether you can benefit from the fall in rates depends on the amount of deposit you have been able to save.

On 8th January the Bank of England cut base rates by 0.5%, bringing base rate down to 1.5%- the lowest figure in its 315 year history.
This time last year base rates were 5.5% and were considered to still be on the increase.
The bank has now reduced rates 4 times since it was at 5% at the beginning of October
However, cutting base rates is not enough on its own to get the economy moving. The biggest problem at the minute is liquidity- banks are just not lending to each other.

What does this mean for your mortgage?
If you’re on a tracker mortgage then you will benefit from the reduction.

However, if you’re on the lender’s standard variable rate (SVR) you need to wait and see whether banks will pass this on. C&G, HBOS and Nationwide have all said they would pass on the full cut to SVR. Halifax cut their rate by 0.25%. But we are still waiting to hear what other lenders plan to do.

Fixed rates by definition stay the same.

Nationwide has just introduced a 95% loan to value mortgage.This is newsworthy since it is the first lender to reintroduce high loan to values. The maximum which can be obtained from any other lender is 90%.
Although this can only be viewed as positive news, the downside is that the product is only available to existing borrowers who are moving home.But it is the first move by any lender in increasing the loan to value. Hopefully in due course others will follow suit and will extend the facility to first time buyers.

The Financial Times has reported that borrowers who would have been desirable customers just a few months ago are being refused the best deals for mortgages and personal loans as lenders take an increasingly firm line on the most minor of credit discrepancies.

Although there has been a sharp fall recently in interest rates the best rates are only available to customers with an exemplary credit report. The FT cited examples of borrowers being refused a mortgage because they had paid a mobile phone bill a few days late, or because they had opened a number of different savings accounts, which had triggered multiple credit searches from banks.

They said that while some lenders were actively touting for new business and claiming to pass on rate cuts to customers, behind the scenes they were being extremely selective about who they would offer loans to.

Borrowers need to be aware that each lender will be in a different position with respect to their ability and willingness to lend. This can change drastically in relatively short periods of time.

Banks are taking a particularly tough attitude with customers who have smaller deposits or are looking to borrow large sums.

Ray Boulger at John Charcol, said some banks were rejecting mortgage applications even when there was a perfectly reasonable explanation for any blemish that appeared on the credit history.

“Lenders are being much less flexible now if a client is good quality but can’t quite tick all the boxes,” he said.