Interest Rate Update 31/8/11

UK Interest Rate: 0.5%

UK Interest Rates Forecast: Rates will remain low until at least late 2012

Buying a House Cheaper Than Renting

Low mortgage rates and a flat housing market now mean that buying a house is cheaper than renting one, according to new research carried out by Halifax.

According to Halifax, typical mortgage payments for a new borrower stood at just 28% of average disposable income in the second quarter of 2011 – the lowest level since 1999 and down by almost half from its 48% peak in the third quarter of 2007.

This means that housing is more affordable than it has been for 12 years – although the Halifax figures do use a historical average 70% loan-to-value ratio when calculating mortgage payments – meaning that a 30% deposit is assumed. This is large for first-time buyers, who currently have an average deposit size of 20%, according to recent figures from the Council of Mortgage Lenders.

According to Halifax, the average mortgage rate for a new borrower is now just 3.85%, down from 5.84% in 2007.

New Scheme to Combat Mortgage Fraud

Starting from the 1st September 2011, a new scheme is being introduced to combat the problem of mortgage fraud, where borrowers overstate their income on mortgage applications.

The Mortgage Verification Scheme has been devised by HM Revenue & Customs, The Council of Mortgage Lenders and the Building Societies Association. It will enable lenders to use tax data to verify borrower's income details.

The National Fraud Authority estimated the cost of mortgage fraud as £1bn in 2010. This suggests that it remains a big problem, despite the demise of self-certification mortgages, which were often abused by borrowers seeking to exaggerate their income.

According to the CML, use of the scheme "will be limited to cases where lenders reasonably suspect, following their own rigorous checks, that mortgage fraud may be taking place." Lenders will be able to pass a borrower's application details to HMRC, who will compare it to the income data on the applicant's tax return.