BrexitSep 28 2016

Spotlight: Brexit and mortgages

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Spotlight: Brexit and mortgages

What is the state of the UK housing market post-referendum? Laverne Hadaway finds out

After the warnings of dire consequences if Britain voted for Brexit and the initial shock of the outcome, everything appears to be relatively rosy in the UK mortgage market. Many of the organisations that predicted economic disaster as a result of a vote to leave the EU are changing their tune and suggesting the consequences might not be quite so dire after all. Both the International Monetary Fund and the Organisation for Economic Co-operation and Development  appear to have revised their perspectives on the economic outlook in the UK following the referendum result.

The Royal Institution of Chartered Surveyors (Rics) says that following “a significant drop in activity and price expectations in the wake of the EU vote,” its UK residential market survey for August 2016 shows a “pick-up in confidence”. It explains that while sales declined sharply in the aftermath of the referendum during June and July, volumes stabilised in August. In some parts of the country, sales are still falling, but expectations have noticeably improved. 

A shortage of housing stock is said to be a key factor: the survey reports that new instructions fell in August leading to a reduction in the number of properties on estate agents’ books for the third month running.

While the latest figures from the Council of Mortgage Lenders shows a drop in the number and value of transactions (see Table 1), the CML says it is hard to tell whether the figures reflect an initial reaction to the referendum or just show the market was already cooling. However, these figures suggest the UK economy has “averted a hard landing, at least for the time being,” but notes many commentators have been “shading down” growth forecasts.

Back to normal

From the mortgage adviser’s perspective, things are relatively back to normal. “Now the summer holidays are over it seems to be business as usual,” says Joshua Gerstler, financial adviser and chartered accountant at The Orchard Practice. He acknowledges that there appeared to be some nervousness in the market and a slowdown immediately after the vote result because of the uncertainty.

But the suggestion that things are back to normal applies to lenders’ rates too. Mr Gerstler says rates feel similar to how they were before, despite the cut in the Bank of England base rate. His suspicions are confirmed by a report from Moneyfacts, which suggests many lenders increased their standard variable rates and trackers just before the rate cut announcement only to cut them in response, effectively leaving them unchanged.

Psychological benefit

For some borrowers, the savings on their monthly payments are so small they are unlikely to provide much of a material boost to the economy. The CML says that a typical SVR customer would see monthly mortgage payments fall by no more than £20. Mr Gerstler says that while the interest rate cut will not make much difference for most people, the benefit is likely more psychological. However, he is concerned that high levels of debt and borrowing remain in UK households and suggests that after their experience of 2008, consumers should be more cautious.

Describing the rate-cutting policy as “a dangerous game to play”, he suggests some people may have difficulty adjusting their spending habits when rates go back up again. At Orchard, clients enjoying substantial monthly savings from the rate cut are encouraged to maintain their old payment levels so as to overpay their mortgages where possible. 

He says that in the run up to the referendum, there was no panic from clients, although some held off from making decisions until they knew the outcome. Once it was over and there was talk of a potential rate cut, many opted for trackers in the run up to the Bank’s announcement. Not surprisingly, demand has switched back to fixed rates.

Mr Gerstler is particularly impressed by Barclays’ offerings. It has just dropped some of its rates and is offering a two-year Help to Buy tracker deal which is base rate plus 1.09 per cent for 60 per cent loan-to- value (LTV). The arrangement fee is £999. 

He also points to a 10-year fixed rate 60 per cent deal that is now down 30 basis points to 2.49 per cent, or an 80 per cent LTV version with a rate of 2.69 per cent. Both have an arrangement fee of £999. Of course, take up of such a long-term product depends on individual circumstances, but he says that a 10-year deal could suit someone planning to be in their home for the long term. 

The relative calm compared to the pre-referendum doom- laden prophecies has led to accusations that some remain backers and Bank of England Governor, Mark Carney, were guilty of Brexit fear-mongering.

From Mr Carney’s perspective, the fact such fears did not materialise was thanks to the success of the steps taken by the BoE to avert economic disaster, rather than an exaggeration of the potential consequences in the weeks leading up to the vote.

However, while it acknowledges that an economic hard landing appears to have been averted, the CML questions how successful the Bank’s actions will be in supporting lending levels. 

It suggests that in the light of MMR affordability tests and macro prudential constraints there may be “little opportunity to buoy borrower demand in a more adverse economic climate”.