It has been a year of two halves in the mortgage market. The first half saw booming housing and mortgage transactions and property prices soaring in some parts of the country to levels not seen since 2007, but since the summer the mortgage market has tailed off; volumes are definitely lower and some of the heat seems to have come out of house prices.
The Bank of England’s Andy Haldane recently attributed this slowdown to three things:
• The mortgage market review
• People “muttering about potential interest rate rises” and also
• Talk about “house prices going crazy”.
The year certainly kicked off on a very positive note with the Coventry Building Society increasing mortgage procuration fees to 45 basis points. It was expected that other lenders would soon follow suit but this did not happen until the second half of this year. Some outliers are still only paying 35bps but the norm is now 40bps for prime mortgage business and 50bps for buy-to-let. I expect more rises either before the end of the year or into the beginning of next as the outliers fall in line and also raise their procuration fees.
The MMR has obviously been the big story of the year. This was the biggest regulatory change to happen to the mortgage market in the last 10 years. As the FCA’s response to the credit crunch, consultation papers had been circulating since 2009; as a result most lenders had made changes before the MMR came into force in April. The biggest of these were the rationing of interest-only mortgages; self-certification had disappeared at almost the time that the first paper came out, while fast track mortgage applications disappeared very quickly this April.
The biggest impact that most people have seen has been the implications of affordability calculations. As a result of the more stringent affordability rules there is now a sector of the population who aspired to home ownership who are now staring into the abyss and may never get on the housing ladder. The long-term effects of this are yet to be seen. For example, will this dramatically increase the number of people who only ever rent? Will we move more towards something like the German housing market with a 50/50 split between renters and buyers? Or is it likely that some people will only ever buy one house as affordability rules and stress testing mean that many families will not be able to move up to a bigger property?
One thing to take the market very much by surprise was the powers bequeathed to the Financial Policy Committee. Stress testing of borrowers’ ability to repay their mortgage was increased from 1 per cent to 3 per cent but the rules were not categoric so it has led to the opaque situation where every lender uses a different base on which to calculate their stress testing. The FPC also introduced rules whereby lenders cannot lend more than 15 per cent of their £500,000 plus loan book, to people on more than four and a half times their income. Intended to take the heat out of the runaway London property market, it was arguably a little premature as the market was already showing signs of cooling due to the implementation of the MMR.
In the short term, the government measures to help first-time buyers and those on the first rungs of the housing ladder seem to be paying off. There has been a great increase in the number of high LTV products this year as a result of the Help to Buy scheme. While not all lenders have participated in Help to Buy it has increased the competition in the higher LTV space.
One area that shows no sign of slowing down is the buy-to-let market. In this year’s first quarter, 22 per cent of gross lending was through buy-to-let. Just five years ago in the first quarter of 2009 this was as low as 9 per cent, and the new pension legislation is likely to fuel this still further with predictions that 16 per cent of people who can access their retirement pot will invest it into buy-to-let property. Arguably in competition with the first-time buyer market, it will be interesting to see what effect this has on the shape of the market; this is by no means an easy investment option, however, especially with the increase in rules for people who rent out property.
Despite the general election and an impending hung parliament, 2015 still looks positive. There are concerns over the wider global economy, particularly regarding Europe and China but Britain is among the top of the growth rates of the G7 countries and housing is still the top of the political agenda for every party.
David Copland is director of LSL mortgage services and head of TMA mortgage club
