It seems that the £50 billion bailout of the UK money markets will not be enough on its own to see the economy through the worst. In an unprecedented attack on corporate governance in the UK, the Governor of the Bank of England Mervyn King has warned the banks that they will need to play their part to ensure that the UK economy does not take yet another turn for the worse. So what is happening?

While there was a flurry of relief that the government had pulled off something of a coup with the injection of £50 billion into the markets, this case is slowly unraveling. We are still seeing mortgage lending slumping month on month, house prices have fallen over the last 12 months for the first time for many years and many mortgage lenders are placing ceilings on the maximum mortgages which they will authorise. The situation is not getting any better in the short term!

It would be unfair to suggest that the government thought the affect would be immediate but the much expected flurry of relief has yet to materialise in the market place. Banks are still running to shareholders for billions of pounds to shore up their balance sheets and many of the smaller mortgage lenders are going to the wall. As many people suggested at the time of the £50 billion cash injection, this is one storm which we will have to ride out and one which will get much worse before it gets better. So what about that tax payers cash?

The £50 billion of tax payers money which was introduced to the markets is still very safe with the banks being asked to provide collateral much higher than the amount of money they are looking to raise. There is also the further safe guard that the banks have committed to covering any potential loses on the government’s asset swap. Even if one of the smaller player or a larger player was to go under, the industry itself would be forced to foot the bill just to ensure public confidence remained high.

There has been little news of late with regards to unemployment figures but these are set to rocket over the coming months. There is often a time lag between the economy falling and jobs being lost, although it will not be long before the bad news starts to flow. We are hearing news over the last few days that some of the larger budget clothing Groups in the UK are under severe financial strain with MK One recently put up for sale.

This is very much just the tip of the iceberg and there will be substantially more bad news before we start to improve. The Bank of England may well be forced to reconsider their current stance on interest rates and inflation and look to cut rates in line with their US counterparts. When you know that £50 billion is not going to bail out your economy you know that you are very much in trouble!

The news of an impending summit between the government and the Council of UK Mortgage Lenders is rumoured to be taking place this week, but what will they decide? Will it make a difference to the person in the street?

At the same time as Chancellor Alistair Darling was dishing out words of wisdom to the mortgage industry which he has very much helped to destroy of late, it was announced that State owned Northern Rock were not even following the governments lead. Northern Rock have yet to decide whether their variable mortgage interest rate will be changed after last weeks base rate reduction, in direct to contrast to Darling’s call. So is this a case of do as I say, not as I do?

While the government will argue that this truly reflects the independent nature of the Northern Rock, which is supposed to be run at arms length from the authorities, how can they then criticise the rest of the industry?

The mortgage industry in the UK is literally on its knees with increased funding costs, a falling housing market and a government which seem keen to squeeze them as hard as they can in order to curry favour with the public. It is difficult to argue with some of the points which the government have made, but does this latest outburst not deflect the attention from the Treasury at a time when public spending is under pressure, government debt is rising and the economy is stalling?

It will be interesting to see if the minutes of the summit are released, showing the arguments from both sides, because from an outsider’s point of view it would be interesting to see what was said and any changes agreed for the future. However, is it not ironic that all talk of a one off banking sector tax charge (suggested when they were all doing well) has now been replaced by an atmosphere of “let us work together”.

The bottom line is that while the mortgage companies of the UK could no doubt reduce their rates a little further, there is still massive pressure on funding. Many have been critical of the Bank of England who have injected just a fraction of the liquidity which their US and European counterparts have, despite the obvious deterioration in the financial sector. But is this the fault of the Bank of England, the consumer or even the government?

Let is not forget that this is a government who have bragged about the increasingly bright economic future of the UK for some time, the fact that the boom and bust scenario had gone for good and kept wage inflation in the public sector to a minimal. Now the economy is failing quickly, the bust scenario is returning and we are seeing more and more strike action in the public sector, and all in just a couple of years.

Will Gordon Brown get the chance to breathe new life into the economy, will the mortgage lenders play ball or has the Prime Minister lost his iron tight grip on the UK economy?

While we continue to see a stream of mortgage offers withdrawn from the market, with HSBC the latest to pull some of their mortgage deals, there are real concerns that the UK property sector could very well go into meltdown over the next 12 months. As more and more mortgage lenders rush for the exit doors we are seeing a number of things happening in the market place such as :-

Increased Rates

While base rates in the UK continue to come under downwards pressure we are seeing mortgage rates actually rise, something which many of the UK population seem to be missing. The banks claim that due to a lack of available credit they are seeing increased funding expenses and increased risk, hence the rise in rates. It should also be noted that this widening of the gap between the cost of mortgage finance and mortgage rates being charged to the public has given the banks more “profit margin” on their mortgage agreements.

Lack Of Competition In The Market

As we see mortgage providers looking to pull more short term deals, competition in the sector is decreasing, something which is allowing many mortgage providers to increase their rates. One factor which has gone largely unnoticed is the Northern Rock affair and the fact that they are actively encouraging mortgage customers to remortgage with other financial institutions, thereby reducing their own mortgage book and releasing funds to repay some of the debt due to the government.

Demand Falling

While the markets have been expecting some kind of fall back in the housing market, after a relentless rise over the last few years, few would have forecast exactly what would cause this retreat. Even though demand has not yet fallen substantially we are starting to see the wave of sellers building, with more and more people desperate to reduce their exposure and scale down their property assets. Historically property owners have reacted very much with the herd mentality and this time is likely to be no different. There will come a breaking point when the sellers grow in number and the buyers retreat knowing that a property they like today will likely be cheaper to tomorrow, so why rush?

Employment

Even though there has been no real mention about the employment situation of late, there is no doubt that as the economy slows we will see more and more redundancies. Those who lose their jobs will then be under more and more pressure to cover their mortgages, with repossessions likely to rise substantially over the next year. This rise in repossessions will also put further pressure on the housing market, with prices falling further and further. Indeed there has been a report today which suggests that over 3 million UK home owners will enter a negative equity situation over the next 12 months.

The mortgage market is literally dying on its feet and even those who are brave enough to buy will struggle to find affordable mortgages at the moment. Over 40% of mortgage providers have recently indicated that they will be pulling some of their mortgage offers from the market over the next few weeks and months, meaning the cost of borrowing will go higher and higher. Unfortunately, we are nowhere near the end game as far as the credit crunch is concerned.

While the signs are that the UK housing market is under pressure, house prices have not yet shown the marked fall which many experts had been predicting, so what can we expect in the short to medium term?

The situation we are seeing in the UK property market is very much similar to that in the early days of the credit crunch, whereby many so called experts are breathing a sigh of relief that we have not seen a collapse. However, as we all know now the credit crunch has come back to haunt the worldwide economy with a substantial slowdown in worldwide industry expected in the short to medium term. The situation with the UK housing market will be similar because of a number of factors which include :-

Lack Of Funding

Many banks and other financial institutions have been forced to curtail the agreement of new mortgages after experiencing funding difficulties in the wake of the credit crunch. There is no short term solution to the problem because central to the problem is the fall in the value of core investments held by many institutions, which historically they had used as collateral for extended finance.

Economic Slowdown

As corporate UK continues to struggle from the slowdown in the worldwide economy, more and more companies will be looking to reduce their costs as profit expectations are slashed for the short to medium term. At some stage cost savings will mean job cuts which will mean less money in the pocket of consumers, which will again filter through into the economy and depress corporate profits yet further.

Inflation

While the Bank of England has full control over the future direction of bank interest rates there is great concern over the recent rise in inflation. The government’s upper band will be breached over the next 12 months with many expecting inflation to rise to more than 3%, which seriously undermines the ability of the Bank of England to slash interest rates as they have done in the US.

Consumer Confidence

Even though historically the UK consumer has been fairly upbeat we are starting to see signs of concern as the taxation policy of the current UK government starts to bite and people are actually beginning to feel the pinch. The impact of higher petrol prices has also had a knock on the affect to the UK economy where extra transport costs have been passed onto the consumer through the higher price of goods, eating away at the income of the UK consumer even more.

Unfortunately for the UK consumer there is no quick fix solution to the problems which we are experiencing now and set to encounter in the short to medium term because a sharp reduction in interest rates has the potential to push inflation higher, thereby affecting the long term performance of the economy. This lack of consumer financial strength will see less demand for houses and more home owners experiencing financial difficulties. Cut price sales will appear in time which will further reduce the strength of the overall market with the potential to see a serious sell off in due course. Buyers who have or can arrange funding are most certainly in a position of great strength, but probably in no rush to buy!

Chancellor of the Exchequer Alistair Darling while delivering his maiden budget speech stated that the Government would consult with industry on fixed rate mortgages for 10 years, 20 years or 25 years period. However, more details are required on the plans, after his last month commitment of grading the mortgage system by giving ‘gold standard’ kite mark to least risky loans. He stated that the support of the Government for shared equity schemes have helped 95,000 homeowners across the country, to acquire their property, especially after Labour took office. He also announced that the stamp duty will be scrapped to 80 percent of the equity value and 8 billion stg would be spent for social housing over the next three years.

The chancellor said that these measures would help to boost the secondary markets which were now facing a difficult situation and also would keep mortgages stable and low. He also promised more support through the cutback of stamp duty on shared equity schemes for the first-time home buyers and key workers. He also added that in the existing weak market, this measure is expected to diminish tax revenues and encourage house buying activity.

Further, land remediation relief has been extended in the Budget to help the brownfield land development. He stated that for supporting existing land redevelopment, new measures are adopted to deliver 200,000 homes by 2016 on the additional land owned by public sector and this will result in increase of supply in housing without using the green field sites. Conversely, the market observers stated that with the identification of more public land sites, the Government’s plan cannot be expanded further as the land availability becomes limited.

On the other hand, the Council of Mortgage Lenders (CML) said that the budget measures may be beneficial for the mortgage and housing market in the long term; however this will not bring relief to the immediate problems faced by the people. But, CML welcomed the move by the Government to help the secondary market and non-commitment of ‘gold standard’ kitemark for mortgage backed securities and covered bonds.

Council of Mortgage Lenders condemned that there is no fixed timescale on providing relief measures and hence this will stiffen up requirements on sale and leaseback schemes. It also said that there was little immediate help for the mortgage or housing market through this budget. It also said that the new announcements on scrapping stamp duty to 80 pct of the equity value on the shared equity schemes would not provide any short-term relief to the first-time buyers as the entry costs will remain the same and hence the buyers may not find them affordable. CML also stated that only a stamp duty reprieve can bring immediate relief to the first-time buyers as this will reduce the entry costs.

New Homes Marketing Board Chairman David Pretty reacting on the budget told that these measures would benefit only a limited number of homebuyers while the raise in stamp duty would affect everyone.

Are you looking for some extra cash to pay off debts, make a big purchase or go for home repairs? Well, you may consider going for equity release plans. Such plans allow you to use your home equity and receive lump sum cash or regular income flow.

How do Equity Release plans work?

Such plans are available in 2 forms:

Lifetime Mortgages:

This involves borrowing money against your home equity in the form of mortgage. So, you get tax-free money in the form of lump sum cash or regular income flow or as credit-line.

If there is an outstanding loan on your home, then you need to pay it off as soon as you take the lifetime mortgage. However, only those aged 55 and above can qualify for such loans.

The interest on a lifetime mortgage is higher than other home loans and while you stay in the property throughout your lifetime, the interest keeps accruing at a fixed or variable rate. You need not make any monthly payment. Instead, the loan is paid off when the home is sold after you or the last surviving borrower die or move into long term care.

However, there are some pros and cons of taking a life time mortgage.

Pros:

1. You retain ownership of the home and can benefit when home prices go up.
2. You may be able to leave behind some equity to your heirs depending upon the size and length of the loan.

Cons:

1. The debt keeps growing with time, though you can limit it by taking out cash only when you require.
2. The entire equity may be used up leaving nothing for your heirs.

Although there are some drawbacks, yet with a lifetime mortgage, you’ll be able to release 18-50% of your equity depending upon your age.

Home Reversion Plan:

Such a plan involves selling off part or whole of your home to an investment company which will pay you a lump cash amount or a lifetime regular income. You will have to transfer ownership rights to the company and any part which you haven’t sold off will be held in trust.

You may remain in the home throughout your lifetime without paying rent and when you die, the company will sell off your property and take the proceeds. But if there’s any portion which you haven’t sold, then that value will pass on to your estate.

The pros and cons are listed below:

Pros:

1. You can leave a fixed part of home equity to your estate.
2. Flexible plans allow you to release equity as and when you need it.

Cons:

1. You cannot retain ownership rights on your home.
2. You will benefit from any rise in the home prices only from the part of equity you still own.

No doubt, there are wide options when it comes to releasing equity, but try to go for the one that best suits your situation.

While the overall UK property market is holding up remarkably well in what are difficult market conditions, there is a good chance that we may see a substantial fall in both demand and prices at some stage. Even though interest rates are on the way down, leading (eventually) to lower mortgage payments, the forecast slowdown in the economy will put pressure on the employment market.

There are signs that some home owners are already starting to feel the pinch as the cost of living continues to move higher, but the double whammy of a slowing economy could suddenly see the number of mortgage player in trouble shoot up. So what can you do?

Rather than wait for potential problems to unfold you should always keep your mortgage provider in the loop with regards to your situation and how you see it possibly progressing. If you are able to keep you mortgage provider onside there is every chance that they will help you when it is required, and they may actually be able to pass on advice which could avoid any future problems. The worst thing which you can do if you sense trouble around the corner is to sit back and let it happen, or bury your head in the sand.

By showing your mortgage provider that you are being proactive rather than reactive this gives the impression that you actually want to help yourself, and avoid any major problems. This is exactly the kind of attitude which many financial companies are looking for, and any concerns that your comments will be used against you in any way are unfounded. Life can be tough with a large mortgage hanging over your head, but there are people out there to help you, there are many who have been through similar markets.

Don’t ever think that it is just happening to you because over the next 12 months it will be those who do not help themselves who will have most to lose!

Over the last few weeks we have seen a concerted effort by the vast majority of central banks around the world to breathe some life back into the credit market, the internal market which provides vital funding for business. While there have been rate reductions in both the US and the UK, many UK mortgage holders have complained that their mortgage rates have not moved in line with base rates. How can this happen?

While on the surface a reduction in UK base rates would normally be the leader for a fall in UK mortgage rates, but these are not normal times in which the finance industry is operating. Behind the scenes the credit market is still in disarray with a vast number of traditional lenders not present, or at the very least not present to the same levels as prior to the credit crunch. This means that internal lending rates are still higher than base rates which is why many mortgage providers have yet to pass on any major reductions to their customers.

The ongoing reduction in worldwide interest rates will kick in at some stage and we will see lending rates return to more traditional level, but as ever with interest rate movements there can often be a substantial delay between the rates moving and the effect it has on the world of business. While there is no doubt that even the indication that rates will fall further in the short term will be well received by the markets, we are in a fairly unique position which many people may not have experienced before.

So is the worst over?

Too many people called the end of the credit crunch too early and it came back to bite them, so anyone who predicts the end of the current situation can only be guessing. The gradual reduction in interest rates on a worldwide basis is a major help, as is the indication that the central banks are willing to be proactive rather than reactive, but it will take some time yet to return to a more traditional market arena.

While the news on both the property and finance fronts continues to get worse there are still people in need of new mortgages, but where can you spot the best rates now? Everyone seems to be diving for cover with the credit crunch still ploughing on and all of the discount offers have disappeared.

Now is not the best time to be taking out a mortgage with the internal bank lending market still under pressure and many mortgage lenders looking to avoid all but the lowest of credit risk customers. Many are asking if the UK mortgage market could actually grind to a halt if there are any more financial troubles in Europe or the US. But could it really happen?

The truth of the matter is that while there is much pressure at the moment the situation will not drag on forever. It is in the best interests of all governments around the world to ensure there is sufficient liquidity for lenders and that rates are attractive enough for borrowers. If we were to see any further financial troubles in the money markets then the chances are that we would see a concerted effort by central banks around the world to ensure liquidity did not disappear, as well as a short sharp fall in interest rate to stimulate demand.

As for finding the best mortgages currently on the market this is still a case of looking around the major financial comparison sites and seeing what is on offer. Some lenders are still offering attractive rates although for how long remains to be seen, with uncertainty about the short and medium term direction of interest rates. There are still attractive rates out there but they may not be as much in the public eye as they have been over the last couple of years. Look and you shall find…..

You may need professional advice when arranging your mortgage loan, unless you are a competent financial advisor or broker. UK mortgages are financed exclusively by banks or financial organisations. There is no market interference by government bodies. Hence, the mortgage market in UK is highly competitive. Also, you can choose from a variety of mortgages, the type that suits you the best.

Most mortgages offered by UK companies work on a variable interest rate. Normally, the variable rate is fixed by the Bank of England. As the market is competitive, the lenders are keen to offer a rate that is somewhat lesser than the variable rate. Also, some companies offer a discount rate on mortgage loans. The discount rates may be applied for first few years of the mortgage. So, this makes the initial mortgage payments lesser than the payments made later. Even some lenders proffer capped rates. This thoroughly benefits the borrower, as the capped rate will be the maximum rate that the borrower will be paying even when the variable interest rates increases to a larger extent.

Some lenders give a cash-back incentive on the mortgages. These cash-back incentives are calculated with respect to the principal borrowed amount. The borrower will receive a certain percentage of the borrowed amount at the end of the mortgage. If a borrower wishes to close his mortgages earlier than the fixed term, then he has to pay pre-payment penalties. That is, he will be charged an additional amount along with the total amount to be paid towards the mortgages. Normally, the pre-payment penalty is calculated as some percentage of the outstanding amount.

There is another type of UK mortgage – a self certification mortgage. Mostly self employed persons who have no means to prove their income opt for this mortgage. If the borrower borrows an amount less than the value of the house and he makes a down payment, then the lender will offer him the self-cert mortgage. But, these mortgages carry higher rate of interest due to the risks involved for the lender.

In a fixed interest mortgage, you will get a fixed interest rate for the whole period of the mortgage or for some years. Normally, 2 to 5 years is the period for fixed interest mortgages. The borrowers can rest assured that the interest rates will not fluctuate and they have to pay only a fixed monthly payment. But, the fixed interest rate is offered at a slightly higher rate of interest and hence if the interest rate falls, then the borrower may feel sorry for his decision.

So, while getting a mortgage for your home, evaluate the risks involved and your repayment capacity. If you can repay the monthly installments without any delay, then only you will have peace of mind. Otherwise, you may get a bad credit history. So, you should thoroughly study every detail before getting mortgage. Also, if you feel that your rate of interest on your mortgage offered by the company is higher than the prevailing market rate, you can refinance your mortgage from some other company.