Borrowers, it seems, have never had it so good as rates reach record lows in response to falling swap rates. Launching his organisation’s lowest fixed rate mortgage to date, a two-year fixed rate of 1.14 per cent (65 per cent LTV), Yorkshire Building Society chief executive Chris Pilling has suggested that two-year fixed rates could even fall below 1 per cent this year.
Not surprisingly, the Bank of England reported a rise in house purchase loan approvals up from 71,221 in December 2015 to 74,581 in January 2016. However, the chancellor’s decision to increase stamp duty on second homes and buy-to-let properties to 3 per cent from April 2016 is said to have contributed to the number of mortgage transactions and the figures for February and April are also expected to show an increase.
Reasons to be cautious
Despite the appearance of recovery and resurgence in the UK mortgage market, there are reasons to be cautious. Unfortunately, it is turbulence in the global markets that is causing wholesale funding markets to fall, enabling lenders to offer such attractive rates. Given the less than favourable global economic backdrop, the governor of the Bank of England, Mark Carney, has already made it clear that it is likely to be some time before the base rate rises, unequivocally stating in January that, “Now is not yet the time to raise interest rates.”
In his letter to the chancellor he cited below-target inflation and its underlying causes – falling commodity prices and below average growth in domestic wages.
Consequently, the MPC voted to keep the base rate at 0.5 per cent for the 85th month in a row. More significantly, the vote in February was unanimous; MPC hawk Ian McCafferty, who has been voting for a rate rise since August 2015, voted in line with the rest of the MPC policy members in acknowledgement of the figures on inflation and low wage-growth expectations.
In its report looking at the UK mortgage market, the Institute of Mortgage Lenders Association (Imla) describes it as relatively stable and effectively in recovery and views lenders’ rate-cutting activities as healthy competition. However, it says the regulations that have been enacted in response to the financial crisis have created a very different kind of mortgage market. “Consumers’ ability to act on any renewed exuberance has been curbed by a much sharper regulatory focus on affordability,” it states, as well as the higher capital requirements on lenders.
The report detects an apparent contradiction on the affordability issue. On the one hand, UK housing is unaffordable as measured using the house prices to earnings ratio; on the other hand, the proportion of the median mortgaged homebuyer’s income spent on mortgage interest is at its lowest level to date, dropping from 10 per cent in 2014 to 8.6 per cent in the third quarter of 2015. In light of this, Imla questions why younger households are not looking to buy in the numbers they used to – especially since it is currently cheaper to buy than to rent – and why lenders are having to discount so intensely to generate higher mortgage volumes.
The Council of Mortgage Lenders (CML) has been looking at affordability too. As borrowers move to make the most of the cheaper deals, CML chief economist Bob Pannell has pointed to a significant rise in higher income lending multiples. He explains that when, in June 2014, the Financial Policy Committee (FPC) announced measures to limit the amount of lending at multiples of 4.5 times to 15 per cent of individual lenders’ mortgages, it had an immediate impact – although it was not due to come into force until October that year. He says that shortly after the announcement the percentage of high income lending began to fall steadily over the following year to around 7 per cent, from a peak of 10 per cent in mid-2014.