It's that time of year again when mortgage lenders get a firm grasp on their crystal balls and look ahead at what is in store for homeowners in the months ahead. Will you be watching every penny or breathing a sigh of relief?
Prospects for the early part of the year certainly look rosy. The Monetary Policy Committee which makes the all-important decisions about interest rates are expected to seriously consider a rate cut in January or February. But what do the industry experts say?
Should we fix it?
Fixed rate loans will gradually come back into favour according to Ray Boulger at mortgage broker Charcol. 'Mortgages are to become even more affordable over the coming months,' he says. 'With fixed rate loans having fallen by 0.5% in the last 4 months and base rate probably at its peak in this interest rate cycle, monthly payments are likely to become more manageable for the UK's mortgage population,' he predicts.
'Consumers who have not been on a fixed rate over the last 12 months have been used to receiving letters from their mortgage lender advising that their monthly payments will be increasing,' Boulger continues. 'Someone with a £150,000 repayment loan will have seen their payments rise by approximately £120 a month in this time and for those with an interest-only loan the rise will have been even more, approximately £160. Yet, it appears this trend is about to be reversed, with fixed rates already falling, and base rate likely to follow. In July 2004, the best 2-year fixed rate was 5.19%. The best deal is now 0.5% lower at 4.69% and this downward movement is set to continue. Of course, anyone who has a variable rate mortgage, be it a tracker or a discount, will benefit when base rate falls, so it does look really good for most borrowers in the coming months,' adds Boulger.
Homes hold their value as lending cools
The only way is up for the value of your home according to the Council of Mortgage Lenders (CML). It is predicting 4% growth in house prices in 2005 and whilst it continues to expect a slowdown in the housing market, the CML believes this will be felt mostly through lower numbers of transactions rather than in any widespread price reductions. Transactions are likely to total around 1.23 million next year, compared with an estimated 1.64 million this year. As lending returns to the more normal levels similar to those of 2002, the CML expects gross lending to total £271 billion in 2005, a drop of £22 billion on 2004. Looking beyond next year, the CML expects a continued slower market in 2006 and 2007. The likelihood is that the housing market is set for stable but slower levels of activity for some time, as the market adjusts from its recent exuberance.
'Although our forecasts herald a slower market, there is good news here for first-time buyers over the longer term,' says CML Senior Economist Jennet Siebrits. 'Essentially, as earnings grow, houses are likely to become gradually more affordable again. Our house price forecasts expect continued subdued growth in prices over the next three years. Although there may be some modest price falls in some areas, we expect national average price growth to remain positive and we do not envisage any dramatic market adjustment. Although our price forecasts are at the high end of the spectrum of those that have so far been published, we see modest price growth as consistent with the positive outlook for the wider economy and with the ongoing mismatch between housing demand and supply,' Siebrits concludes.
Stay confident
House prices will remain broadly stable according to Alliance and Leicester (A&L) forecasts although they could take a downturn if consumer confidence is dented. 'Interest rates remain at far lower levels than in the past and unemployment also remains extremely low but if the continued speculation and "talking down" of the market continues then this will inevitably have an impact on the market and an adjustment in prices may occur,' explains head of Mortgages Paul Cooper.
Cooper predicts that 'the general environment for home ownership will remain attractive. Bank base rates will stay at historically low values along with continued low unemployment, and inflation appears to be well controlled. Most of 2004 was a ‘sellers' market, we predict that next year will be far more balanced and that purchasers will be able to be more selective in choosing their next home.We don't predict any major change to interest rates next year, unless there is a major change in the world economy or domestic retail spending.'
Staying positive should not be a problem says Nationwide. The building society's latest survey of consumer sentiment has found that nearly 60% of people are confident that 2005 will be a better year than 2004 for their family. 30% expect next year will be the same and just 5% believe it will be a worse year. When focusing on the outlook for the economy over the next six months, the survey illustrates that people remain optimistic with 71% of people expecting the economic situation to remain the same or to improve. And when considering expected property price changes over the next six months, people remain optimistic: a third now expect an increase in property values versus less than a quarter who expect a decrease.
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