Despite the property downturn, residential mortgage lending has remained remarkably constant. Mortgage Shop managing director Peter Seymour explains why

LAST year started with high hopes that the Jersey property market would begin to revive and, indeed, this seemed to be the case until June, when there was a noticeable slowdown which continued until late October, when the seasonal rush up to Christmas began.

We are now in our 31st month of slowdown in the property market, and while many potential buyers and sellers have put their plans on hold for the time being, it is apparent that the ever increasing pressure on others to move house or to enter the market as first time buyers will result in a surge of activity in the first part of 2011.

Home improvements Residential mortgage lending, which will average about £700 million in a normal year, has not fallen significantly since the start of the crisis which is surprising until one looks at the reasons behind this.

Certainly, property transactions have fallen noticeably during the past two years or so and, therefore, somebody has still to be borrowing the money.

The answer lies in the fact that, while many owners are staying put, this does not stop them from re-mortgaging to raise large sums of money to spend on refurbishing their homes, replacing kitchens and bathrooms, building extensions or putting up conservatories.

Try finding a good builder, electrician, plumber or similar tradesman at the moment, let alone an architect, or take a drive around the countryside to see the explosion in activity that is currently taking place.

This trend is likely to continue into 2011, although the medium term implications of all of this activity will mean that more homeowners will stay put for longer, as the incentive or justification to move has been eliminated.

What impact this will then have on the availability of properties, mostly houses, on the local market will no doubt be seen in due course, although with so many other properties already on the market, buyers are still going to be spoilt for choice.
Bank base rate 2010 has been the year of the tracker rate, with borrowers, taking advantage of the lowest base rate in history, able to reduce the monthly cost of servicing their mortgage to the absolute minimum.

The groundswell of opinion, however, from outside of the Bank of England, is now becoming more critical of Mervin King and his Monetary Policy Committee in relation to the manner in which they are managing the financial crisis in the UK and, with increases in base rate becoming more of a certainty, it is likely that 2011 might become the year of the fixed rate.

Many forecasts are being made about when the base rate will rise and by how much, although with there being no certainty as to when this is going to happen, it would be unrealistic to start putting rates and dates together.

Fixed rates If one assumes that rates will ultimately increase, there is now justification for newcomers to the market to abandon any thought of low tracker rates and to shelter instead in the security of one of the extremely competitive mediumterm fixed rates which are currently available and which start at 3.99% for periods of five years.

Similarly, existing borrowers who are on tracker rates might now be persuaded to reconsider their position while fixed rates are available at these low levels.
Our team at The Mortgage Shop has always insisted that our clients look at all of the options available to them before signing on the dotted line, although the lower monthly cost of tracker rates has, until now, won the day.

This pattern will need to change, if one accepts that rates will rise in due course.
By way of example, the cost of a £250,000 mortgage over a term of 25 years, at the lowest tracker rate of 2.29% that is currently available, will increase from £1,095 per month to £1,815 per month if base rate were to increase to 5%.

This increase represents a staggering 66% on the original monthly payments, and, while we do not expect to see a base rate of 5% in the foreseeable future, the example reinforces the argument that options other than tracker rates need to be looked at.

Historical rates When I first opened The Mortgage Shop in 1990, interest rates were on the increase and eventually peaked at 15.70%.

This was a variable rate of interest as it was not then possible to fix a mortgage rate as you can nowadays.

The high rate, however, did not stop considerable activity in the property market as purchasers and borrowers adjusted their budget to suit the circumstances.

While rates will increase during the next few years, albeit not to the same levels as in the early 1990s, I suspect that this time around most people will find increasing mortgage costs more bearable as they will not also be carrying the extra burden of credit cards, personal loans, hire purchase repayments, etc, which was commonplace before the current crisis.

Property prices Having got the bad news out of the way, we can now focus on the positive side of 2011.

It is apparent that property prices across the board will have to fall further before the market starts to pick up again.

Indeed, those sales which have been going through have, in the main, resulted from vendors acknowledging that they had to reduce their sights from the value their properties held in the period up to mid-2008 to achieve a sale.

Jersey Home Loans Jersey Home Loans, who were the largest lenders in the market in 2006 and 2007 and who ceased lending nearly two years ago, plan to re-enter the Jersey market from February this year.

Criticised by some for their high rates of interest and their costly early repayment penalties (no more than some of the other local lenders), this small building society gave many first-time buyers, property investors and mature borrowers the only opportunity available then to become property owners.

While they tell us that they will be offering mortgages with stricter underwriting criteria, their return will be most welcome and should help to introduce more competition to a market that at present is controlled by only five lenders.