Cheap Chinese mortgage deals arrive in the UK

by Cliff D'Arcy on 05 August 2009  |  10 comments
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Bank of China, the world's third-largest bank, has started lending cheap tracker mortgages to UK homebuyers. Cliff D'Arcy finds out if these deals are really as good as they seem...

British banks had an easy ride between 1995 and 2007. During the twin booms in credit and property, they lent enormous sums and made ever-higher profits. Then along came the credit crunch, followed by an economic recession...

Tough times for British banks

As property prices crashed and bad debts soared, British banks watched roughly a decade of profits go up in smoke, leaving them desperately short of spare cash. Thanks to this downturn, our home-grown banks have becoming increasingly cautious.

As a result, banks will lend only to the best homebuyers -- those with spotless credit records and large deposits. The result is a 'mortgage freeze', with the best mortgage rates reserved for first-class borrowers. Everyone else either pays much higher interest rates or gets turned down flat.

New entrants ride to the rescue

This lack of capital among British banks is reducing competition, which bumps up mortgage rates and stifles the housing market. Then again, with the Bank of England base rate at an all-time low of 0.5%,there is plenty of money to be made by lending at rates of, say, 4% to 7% a year.

These attractive margins on new lending have caught the eye of foreign banks, with several recent entrants to the UK mortgage market. These new players have launched with lower mortgage rates and looser eligibility criteria, making them extremely attractive to British borrowers.

Market-beating rates from foreign banks

The prospect of rich pickings has drawn banks such as Israel's Bank Leumi (UK) and Sweden's Handelsbanken to these shores. While these banks may not be well-known names in the UK, they are happy to lend to British borrowers at highly competitive rates.

For example, Bank Leumi has the lowest five-year tracker mortgage rate in the UK: a mere 1.625% above three-month LIBOR (plus a fee of £1,000). Earlier this week, BBA LIBOR was 0.8975%, so Bank Leumi's tracker rate works out at a very low 2.5225%. This undercuts every mainstream UK lender in this category, as show in the table below. Again, this loan is aimed at prudent borrowers, as it requires a deposit of 35% of the purchase price.

* LIBOR differs from the base rate; you can read about it in this article from the British Bankers' Association.

Best Buy long-term trackers

As you can see, for borrowers with very large deposits, Bank Leumi offers the lowest tracker rate. For those with at least a 25% deposit, HSBC and its subsidiary first direct come top, with Bank of China following closely behind.

However, bear in mind that tracker rates rise and fall in line with the base rate. Given that the base rate is so low, the only way is up, so these tracker rates could rapidly rise if the Bank of England hikes the base rate in order to curb inflation. Also, Bank Leumi's rate is linked to LIBOR, which is much more volatile than the base rate -- and LIBOR went through the roof last year after Lehman Brothers collapsed!

From Beijing to Britain

For me, the really big news is that Bank of China has dipped its toe into the UK mortgage market.

Although Bank of China (UK) has had a presence in the UK since 1929, its lending was restricted to member of Chinese communities. This month, Bank of China has joined forces with four mortgage brokers in order to bring cheap loans to British borrowers.

Bank of China is the world's third-largest bank and has a vast amount of spare capital available to lend. It's not unusual for Chinese adults to save two-fifths (40%) of their disposable income, versus the UK's savings rate of 3%. Thanks to its huge financial reserves, Bank of China can make a tidy profit from lending in the UK, yet still undercut its British rivals.

For borrowers with a 25% deposit, Bank of China has a lifetime tracker rate of 2.5% over base rate (plus a fee of £995), which comes to 3% a year at present. Buy-to-let landlords can borrow at 3% over base, or 3.5% a year. The maximum loan size is £1 million and borrowers must attend a face-to-face interview at one of Bank of China's five UK branches.

We've seen this all before

Homeowners and homebuyers will welcome this influx of new lending, because an increased supply of funds for lending will help to meet demand from mortgage borrowers. It will also keep British lenders on their toes, forcing them to compete by lowering their mortgage rates.

While an aggressive entry by Bank of China and other overseas banks will help to thaw the mortgage freeze, it does present problems for our domestic banks and building societies. When one of the world's biggest lenders steps into your market, you need to sit up and pay attention.

Then again, should our British banks really be worried about these foreign upstarts? After all, the major high-street banks dominate mortgage lending. For example, Lloyds Banking Group currently provides one in three of all UK mortgages. Such a dominant market share will not just vanish overnight.

In addition, we've seen this all before. In the late Eighties, foreign banks rushed into Britain, only to depart with equal haste during the housing crash of the earlier Nineties. Nevertheless, British banks should be worried by the news that our home loans, as well as our consumer goods, are now "Made in China"!

Finally, don't be worried about getting a mortgage from a foreign bank. Remember that the bank has lent you a lot of money to buy a house, so it's at risk, not you. You need worry about a bank's stability only if you have savings of more than £50,000 with it. Hence, you won't lose out if a foreign mortgage lender gets into difficulty.

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