Mortgage rates have been among some of the lowest since records began, according to the Council of Mortgage Lenders (CML), as lenders compete for business in a bid to meet their targets. The Bank of England estimates that the average quoted rate on a two-year, fixed-rate 75 per cent LTV mortgage was 1.84 per cent in July, down some 70 basis points on the same month the previous year.
Not surprisingly, activity in housing has increased with 117,661 mortgages worth £18.8bn approved in July, compared with 108,890 a year earlier. The CML reports demand is likely to remain strong, underpinned by recovery. Much of the surge inactivity is related to remortgaging, which hit a four-year high in July, rising 29 per cent year-on-year according to the British Banking Association (BBA). The Chart shows seasonally adjusted figures for approvals on remortgaging loans.
This was to be expected as borrowers seek to fix rates in anticipation of an increase in Bank base rate (BBR). With the rise clearly nearer than ever, lenders’ rates are beginning to creep up again. Seven years on from the global financial crisis, however, experts argue that not all mortgaged households are in a position to take advantage of these attractive rates.
Part of the problem has been the new mortgage regime which has left some existing borrowers as ‘mortgage prisoners’,unable to remortgage under the new rules, especially as many lenders are choosing not to make use of the transitional arrangements set in place for this very category. These borrowers are in danger of being left high and dry on their lenders’ SVRs and are consequently vulnerable to rate rises.
Weakness
The other problem is the weakness of household income. In its minutes from 5 August 2015, the MPC noted that, although the household sector debt to income ratio had fallen some 20 percentage points from its 2008 peak, it remained high by historical standards.
In May 2014, the Resolution Foundation, a social policy think tank, published a report that modelled household debt, affordability and borrowers’ access to refinancing as interest rates rise. Based on Office of Budget Responsibility (OBR) forecasts – including the assumption that BBR might rise to 2.9 per cent by the end of 2018 – the report suggested that modest interest rate rises could cause significant affordability pressures for around 2.3m mortgage borrowers, who would be spending around a third of their income on mortgage repayments.
It argued that low interest rates are effectively masking the number of households that may be struggling. While the low rates have provided households with the opportunity to reduce debt, many have been unable to take advantage due to unemployment, underemployment and falling incomes, or because they are mortgage prisoners.
Revisiting the report a year on in his blog, its author, Matthew Whittaker, has considered its predictions in light of circumstances. This year began with many anticipating interest rate rises at least towards the end of the year. This has since been revised to the beginning of 2016 and a question mark remains over the schedule in light of massive falls in China’s economy. Mr Whittaker welcomes the decision to slow down rate rises, and the suggestion from the Bank of England that BBR is more likely to be 1.4 per cent by 2018 rather than 2.9 per cent. This would mean some of the predictions might not be so severe.
Debt legacy
However, he believes the issues that contributed to the crash and its prolonged effects have not gone away either. He also points to “the continued presence of a sizeable number of households in which the legacy of debts built up before the financial crisis… weighs heavily”.
While the low rates have provided much needed relief for homeowners, effectively easing the immediate financial pressure, because many households’ earnings and incomes remain low they have not been able to reduce their debts in any meaningful way.
He writes: “Seven years on from the start of the financial crisis, it seems likely that debt exposure among those on low and middle incomes remains little changed.” Consequently, the conclusions of the original report still stand: even modest rate rises could produce affordability issues for a sizeable minority unless incomes recover in a strong, sustainable way. He readily concedes that rates have to rise at some point, since prolonged low rates can contribute to bubbles, for example.
Nevertheless, as Mr Whittaker also points out, it is low economic growth and recognition of the weakness in household incomes in particular that have helped to keep BBR at a historic low for so long. He argues that what remains crucial is “the sequencing” of rising borrowing costs and rising income. Presumably though, once the economy picks up and the decision to raise rates is taken, it is likely to open up a clear divide between the haves and have nots.
