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Quantitative Easing and Mortgage Availability

By Andy Shaw | January 25, 2010

Originally Posted 2nd January 2009

A Question From A Site Member:

Hi Andy Given the Fed’s decision in the US to go down the path of “quantitative easing” (my understanding is that in essence this means making more money available for the banks to lend) and the likelihood that this will (albeit eventually) happen in the UK, what impact do you think this will have on the availability of reasonably priced mortgages in the UK? Like many people on the site I am seeing amazing deals but access to funds at 70% or even 60% LTV mean that there are very few at the moment that I can actually go for. The UK also follows the quantitative easing path then should we see cheaper and better mortgages soon? Or am i being blindly optimistic again? All the best Andrew

Firstly the governments are saying that they are adding this money in so that there is more money going to be available for lending. I think the truth is somewhat different.

They are making quantitative easing more paletable for everyone by saying this, in truth there is plenty of money about with those that have it but frankly they don’t want to lend it, and what’s worse is that the majority don’t want to borrow it, and the ones that do want to borrow it are the ones the banks don’t want to lend it to.

For example I spoke with a bank manager in Cyprus last week who explained the mortgage deal he was finding it easiest to get through right now. You want to buy a property for 300k, well if you deposit 300k with him, he’ll pay you 6.75% interest on it. And if you leave it with him then he’ll give you 100% mortgage against these funds and charge you are rate of just 7%…meaning that you are only paying 0.25% to use your own money to buy that property (yes, I know it is mad, but this is the world we are living in right now).

Also ‘Buy-to-let’ is considered ‘sub-prime’ and therefore no bank really wants more of that on their balance sheet. So I see these extra funds just coming in as cashflow to the banks and very little being lent out. The BoE know this, but then they get paid on the money so why wouldn’t they want to pump more into the system (I’m being somewhat unfair there).

But the politicians know that the economy needs loans otherwise it will die. So I’d say shortly we will see more money following in from funds released purely to make loans in certain markets. These of course will be government guided choices so therefore will not likely be in the right place. Then when the banks fail to get the money out fast enough, I’d say the government will start to use its own companies to get the money on the street (HBOS, Lloyds, RBS and our favourite Bradford and Bingley).

The trouble is all of this is going to take time and the economy needs fast progress, these idiots (for lack of a more apt description) think what is going on is under control, wait until you read that line again in 9 months time when we are really in trouble. Basically all I said in a recent article needed to have already happened and the predictions I have made as to what will happen if they do not do it are unfortunately closer to becoming a reality. Frankly I don’t think we can stop it now.

However, all that gloom said, I do think better deals will become available within the next 4 months, that’s too general, I think workable re-mortgages will become available in that timeframe. How long they hang around for though is a little more dodgy. I think efforts will be made to keep the credit supply flowing and bearing in mind that by that time we will be under a year away from an election I think he will be using a lot more of the tools he has available.

If Gordon Brown gets this right, which in itself will create a floor in the housing market, then 80% mortgages will come back onto the table as well. Now given the yields and direct money supply that should mean competition for clients starts to show up again and that will mean an almost overnight change in the lending for the banks. I.e. they will have good deals at the right price, however, that’s if he applies some of the suggestions I’ve made, or if a ‘new’ problem occurs to help make this a must solve problem then we could see a real change.

Frankly I think the next six months are going to be tough for property investors until the deals start coming, then the following six will either get better or worse depending on what actions the government have taken.

The answer is to not rush in, but to buy and retract your money and then buy again, this is not the time to be taking big risks. Small movements forward, consolidate then move again.

Best wishes

Andy

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