Henry Pryor Says: Good news! Libor rate drops

Search: Latest house price figures

Good news greets me in the newspapers after the Christmas break - three month LiBOR (the rate that banks charge each other and, as we have learnt before, is much more relevant than the Bank of England's base rate) has dropped a full one and a quarter percent and is now only half a point above the Banks rate of 5.5%.

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As you may remember, it was at nearly 7% in November which meant that to make money, lenders had to offer new borrowers rates starting with a seven just to make money.

The 1.25 million borrows coming off fixed-rate deals in 2008 were staring at nearly 50% increases in their monthly mortgage costs, something that was bound to add to the already high repossession figures we are expecting from the CML at the end of January.

But the pressure is lessened, at least for the time being. There are some who still think that the intervention last month by Central Banks around the world will only provide a modest respite and it is worrying to think that the high LiBOR rate which was the rock upon which the Northern Rock floundered could rise once again.

If your mortgage rate is due to revert to the Standard Variable Rate (SVR) in the next few months then you really ought to start to shop around and see what you can get.

Not because the cost itself is going to necessarily frighten you but because lenders have come up with a new and dastardly way to make up for the loss of business since the credit crunch. They have increased their arrangement fees - dramatically!

Arrangement fees have effectively doubled since 2005. When the market was booming it was not unheard of for lenders to waive the fee entirely as they fought each other for business. How times have changed. Some cunning lenders are now looking to charge a percentage of the amount borrowed rather than a fixed amount.

Between 0.2% and 3.5% seems to be quoted which means that someone looking to borrow £200k (the average price of a home) is being asked to fork out £7,000 to have the mortgage 'arranged'! See what I mean. The average family house is now around £350k. This could mean an arrangement fee of over £12,000!

Lenders seem to be shy about including these fees in their adverts and it's hard to find a mortgage comparison site that tracks arrangement fees but beware of the small print.

The latest Land Registry figures didn't make such good reading. Their latest report out on 4th January reports a 30% drop in the number of sales of homes below £250,000 in September compared to the year before. All year, the numbers have been between 15% and 35% lower.

A reflection of just how unaffordable houses have become to the vast majority of first time buyers. Since supply of new properties for sale has dropped by a similar amount each month, the supply and demand ratio has remained pretty stable which has kept prices from diving but I don't expect this to continue.

Supply will pick up as forced sellers make their predicted entry and all those buy-to-let landlords who haven't made the mint they expected will flood the market. At that point we can expect prices to fall further ending the year 10% lover than they are today. For some this will be up to 30% lower than the price that they might have hoped to get last summer!

As I said at the top, Happy 2008!

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