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In a move to help homeowners who are unable to move house because of negative equity, Nationwide have announced that existing borrowers will be able to obtain a mortgage of up to 125%.

Customers can obtain a new loan based on 95% LTV. They can also carry over up to 25% of the loss on their existing property. The 95% loan will be on a fixed rate with a higher interest rate attached to the negative equity balance carried over.

It is considered other lenders are considering something similar.

This is a very surprising move in the current environment when mortgage lenders have become extremely cautious and are mainly targeting those with high deposits.

Rates started to increase initially due to expectations that interest rates will be considerably higher on the future. This followed a rise in the swap rates- the rates which determine the cost of bank funding.

However, fixed rates have continued to increase, even though swap rates have stabilised. . This is because banks are less willing to lend. The shortage of bank funding has seen banks increase rates to control demand. Once one lender starts to increase, all other lenders follow suit, because no lender wants to be the one with the cheapest rate picking up all the business.

The most attractive rates are still reserved for those with large deposits or significant equity in their home. First time buyers continue to struggle to get a decent rate

Since fixed rates have now already priced in considerable rises to the base rate, it becomes a more difficult decision to determine whether a fixed rate or tracker rate is the best option. If rates do not rise as quickly as expected, the fixed rates may end up looking expensive compared to trackers.

Make sure you discuss your priorities and your budget with your mortgage adviser to determine the best option for your circumstances.

Fixed rate mortgages from a number of lenders have increased today following increases in funding costs. Rates are now expected to rise to deal with increasing inflation.

Interest rates are at an all time low but it is considered there is now only one way they can go. Once they start rising the rise could potentially be quite steep.

The Guardian highlights the following reasons why there are fears of inflation:

• Oil prices have more than doubled, hitting an eight-month high of $72 a barrel yesterday;
• Manufacturing output in the UK increased in April, prompting predictions that the recession is coming to an end;
• There are fears the Bank of England’s £125bn quantitative easing policy could feed through into rising prices if consumer demand recovers rapidly.

There are growing signs that the housing market is experiencing a spring bounce. Figures issued by the Council of Mortgage Lenders today showed a 16% jump in mortgage lending to people buying a home during April.

Once a few lenders start raising rates the others are quick to follow. In the current environment no lender wants to be the one out of step with all the competition getting more business than they can cope with.

If you haven’t yet fixed your rate now would be the time to start discussing it with your mortgage adviser, before rates go even higher,

There has been an increase in positive data coming relating to the housing market over the past few days:

• Hometrack, recorded that house prices remained unchanged in May. This is the first time in 20 months that the survey has not shown a fall.
• Data from UK Land Registry showed that although house prices in England and Wales fell in April, the drop was the smallest monthly drop in nearly a year.
• The latest house price survey from Nationwide showed an increase of 1.2% in May. This has been the single highest monthly improvement since late 2006. It is also the second average rise in the past 3 months.
• During April there was an 8 per cent rise in the number of mortgages approved for house purchases. This was the third consecutive monthly rise.
• The decline in the construction sector eased in May to its slowest level in more than a year.

No one would suggest that the housing market problems are over. However, it does make a change to see that some positive data is available. Having seen monthly falls for so long it does raise my spirits.

House prices often move erratically up or down rather than show steady monthly movements in a single direction. I suspect that any increase in actual house purchases is likely to be gradual and rather fitful for some time to come.

Following recent increases in the swap rates The Financial Times has reported that a number of lenders are set to increase their fixed mortgage rates this week. Rates most likely to be increased are on the longer term eg 5 year and 10 year fixed rates.

The majority of rates have not yet been increased. Therefore if your adviser has given you a rate do start the application process ASAP before the rate is withdrawn

What are the chances that in the coming weeks we are we likely to see more mortgage products being made available?

It has recently been reported in The Financial Times that banks are now displaying a renewed appetite for lending”. As a result banks are now beginning to ease criteria, making more products will be available, including to those with smaller deposits. Up until now the only competitive rates were available for those with a 25% deposit. Certainly wouldn’t include a typical first time buyer!

The recent injection of cash from the government has assisted significantly in that more funds have now been made available for lending.  In addition there are now a number of reports that the property market is stabilising. There isn’t talk of price rises; but a numbers of reports now suggest the fall is easing.

Is good news around the corner?

New mortgage rates have recently been offered by Bank of Scotland and Halifax specifically aimed at existing borrowers with little or no equity in their homes.

Due to the lack of available products any lenders coming out of a fixed or tracker rate could only take the lenders Standard variable Rate (SVR). The SVR is currently very low (3.5%). However, if rates increase later in the year the SVR could then become unaffordable.

The Financial Times have reported that a Halifax spokesman confirmed that the available rates could be made available for existing customers in negative equity, although this was not “a hard and fast rule”.

Whilst this is only good news if you are currently with one if the 2 banks mentioned it can only be hoped that some of the other lenders also follow.

Mortgage approvals have risen by the biggest margin for three years in February according to the FT. In addition, lending to companies has also grown at its strongest pace in almost a year.

Other good news is also from RICS and Hometrack. The Royal Institute of Chartered Surveyors (RICS) are reporting increased enquiries from new buyers, and property expert Hometrack has reported house prices are declining at a slower pace.

“It adds to the glimmers of hope that the UK is nearing a bottom, or will reach the bottom in the first quarter of this year,” said Colin Ellis, an economist at Daiwa Securities SMBC, whose forecasts for the UK economy are among the least optimistic in the City of London.

Whilst there is still a long way to go until approvals and company lending meet anywhere near their earlier peak levels, it is heart warming to see some good news on the property front.

As identified in the previous posting, the Consumer Price Index has risen to 3.2% for the 12 months to February 2009. In order to counter inflation it is possible interest rates will be increased. The result of increasing interest rates is that consumers then have less disposable cash and reduce their spending. Hence, inflation then stabalises.

Whether rates may start to rise again depends on whether the February figures are a one off or if they get repeated in subsequent months. If February figures are a sign of things to come then it is very likely that mortgage rates are now at their lowest and we may not see any further falls.

The FT has advised that brokers recommend fixing mortgage rates now rather than hoping for further rate cuts and to opt for longer-term rather than two-year deals. Five-year deals may be slightly more expensive but customers who fix for two years risk coming out of a deal at a time when interest rates are rising again.

A paper due to be published by the FSA later in the year will consider various proposals to control the amount of lending for each borrower. Regulations may be introduced to limit the maximum loan to value and also limit maximum income multiples.

Whilst it would be hard to argue that all lenders have been prudent in their lending up to now, I’m not sure limiting salary multiples is the right way to go. Most lenders now use an income calculator which takes account of the number of adults and dependent children within a household. For example a married person with a non working spouse and 2 children has a significantly different disposable income to a single person on exactly the same salary.

Limiting a mortgage advance to eg 3 times salary will have a very different monthly cost when base rates are 0.5% as opposed to when base rates are 5%.

Lending needs to be prudent but salary multiples are too narrow a criteria to use. Maximum lending needs to be based on affordability.