The value of new mortgage commitments was the highest recorded since 2007 on the eve of the "mini" Budget, which brokers say has since “torpedoed demand”.
Today (December 13), the Financial Conduct Authority published mortgage lending levels for the three months to September 30.
It recorded a 4.5 per cent uptick in lending agreed to be advanced in the coming months, compared to the same period last year.
Mortgage arrears had also decreased by 1.4 per cent over the quarter and 5.1 per cent over the year, with 0.78 per cent of outstanding mortgage balances in arrears - the lowest since records began in 2007.
The "mini" Budget, which was announced seven days before the end of this period, saw former chancellor Kwasi Kwarteng announce a series of unfunded tax cuts which sent swap rate, an indicator for mortgage rates, soaring.
Bigger loans, due to affordability reasons, are becoming far harder to obtain.Elliott Culley, Switch Mortgage FinanceLenders pulled out from the market en masse as they struggled to price their mortgages in the wake of economic uncertainty as the pound crashed and pension funds were thrown into turmoil.
“The third and fourth quarters may as well be in different dimensions, as the mayhem caused by the mini-Budget saw lenders up their rates sharply, which torpedoed demand,” said Andrew Montlake, managing director of mortgage broker Coreco.
“The mortgage market in the third quarter was fluid but now, like the weather, it’s frozen. Higher interest rates and sky-high inflation, coupled with an economy edging into recession, will see the fourth quarter figures differ significantly.”
While many prospective buyers are also waiting to see if house prices come down significantly in the months ahead, Montlake said there is still some demand among first-time buyers.
“They are desperate to exit the rental market as rents hit Olympian heights,” he explained. “If they fix for five years, they’re betting that they’ll ride out any potential negative equity dip.”
According to the FCA’s data, 5 per cent of new mortgages had a loan-to-value ratio of more than 90 per cent, the highest since the start of 2020 when the pandemic first set in.
Mortgages with high loan-to-values are more susceptible to negative equity, because a house value has less to fall before it is worth less than the mortgage secured on it.
Remortgages to buoy 2023
Managing director at broker Penny House, Sofia Jones, said the third and fourth quarter will prove to be “worlds apart”.
She said following the now infamous "mini" Budget, demand from buyers understandably “dropped off a cliff” as mortgage rates shot up to average highs of 6.5 per cent not seen in over a decade.
“Where we have been busy is with requests to remortgage as people sought to protect themselves as best they can,” she said.
Around 1.8mn mortgage borrowers are expected to remortgage next year, according to UK Finance. Many brokers will be honing in on this opportunity if new business slows further.
Borrowing power dwindles
Director at Hayling Island-based Switch Mortgage Finance, Elliott Culley, said the main enemy now was inflation and the effect this is having on people’s ability to borrow the amount they require.
Inflation is at a more than 40-year high, and wages are yet to catch up.
Average pay growth adjusted for inflation fell by 2.7 per cent, according to data published by the Office for National Statistics this morning.
Experts have said this is “worryingly near” the record fall set earlier this year at 3 per cent.
“Bigger loans, due to affordability reasons, are becoming far harder to obtain,” said Culley.
“People can't borrow what they could have earlier in the year. This trend will continue and the energy price guarantee is to rise further in April. How lenders approach the affordability problem will shape the next 12 months for the market.”
Rate reductions could turn the tides
Since the "mini" Budget, the mortgage market has calmed in so far that swap rates have settled and it has become easier for lenders to price mortgages.
This has prompted mass rate cuts despite a further base rate hike by the Bank of England. Experts reckon rates will continue to fall this week, following another hike which will take the base rate over 3 per cent.
Many reckon the hikes were already priced into mortgage products when lenders responded to the volatility of the "mini" Budget by increasing rates at record pace.
“The rate reductions of recent weeks and the re-introduction of products are definitely a positive sign in my eyes,” said Louis Mason, manager at broker Oportfolio.
“We are already seeing people, especially first-time buyers and buy-to-let investors coming to us, ready to start looking at their mortgage options again.”
ruby.hinchliffe@ft.com
