Having operated at greatly reduced levels both in terms of aggregate volume and value since the global crash of 2007, mortgage lending is finally showing signs of gaining momentum which bodes well for the housing market.
Latest data from the Council for Mortgage Lenders (CML) suggest that gross mortgage lending in the UK reached £142.9 billion in 2012, up from £140.9 billion the previous year. Even more encouragingly, the CML expects this number to rise to £156 billion this year.
A major factor behind this sudden positive movement in the mortgage market is the impact of the Bank of England’s Funding for Lending Scheme (FLS). Introduced last summer, FLS is designed to reduce funding costs for the banks and encourage them to increase their lending to businesses and households. Under the scheme, which has so far provided around £4.4 bn of cheap credit, banks are incentivised to increase lending at below the market rate.
This reduction in the cost of money has enabled banks to pass on some of the savings to their clients in the form of lower interest rates, which explains why so many banks are currently offering very low fixed rate mortgage deals. How long the banks will offer these aggressively priced deals will depend on how long FLS remains in place and on the future interest rate environment. FLS is scheduled to run until the end of January 2014 and the current consensus among economic experts is that bank rate will remain unchanged until then and probably beyond.
Increased competition among lenders is also a contributing factor to the current spate of attractive mortgage offers as banks seek to grow market share and take advantage of the undoubted pent up demand from aspiring homeowners.
Some examples of heightened levels of competition in the mortgage market come from lenders such as Nationwide who have announced cuts to 90 per cent LTV products with rates now available below 4.5 per cent. Increased lending has also brought a greater choice of products to the market from smaller lenders such as Cambridge Building Society, Kent Reliance and Metro Bank in response to the demand for more bespoke products for those who are typically refused from the mainstream lenders.
Research from Springtide Capital has shown not just an overall increase in mortgage approvals but specifically a rise from overseas investors and buy-to-let landlords in the last few months. The most competitive mortgage for many lenders is the 5 year fixed rate which has been significantly reduced from around 4% to under 3% in the last year.
This has been of significant appeal to clients who are looking to cut down on access fees and are keen to invest in UK property. Similarly, buy-to-let mortgage products are now available at the lowest rates seen for six years with the average buy-to-let fixed mortgage rate now available at 4.69% compared with 5.04% last year.
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The improvement in the mortgage environment has perhaps been surprising given the tightening regulatory landscape. The Mortgage Market Review (MMR) and Basel III require banks to be more responsible in their lending which in some cases has resulted in lending criteria becoming more stringent, in particular with regard to interest only mortgages, which are often preferred by purchasers at the higher end of the market.
In fact, there has been a decline in the number of lenders offering interest only mortgage products in the last twelve months. FLS, however, has produced a number of competitive rates for high net worth individuals who would be most suited to niche products such as interest only. Yorkshire Building Society, Virgin Money and Chelsea Building Society have come up with fixed interest only rates as low as 2.34% across a 2 year period which is yet further evidence of market adaptation and innovation on behalf of some of the smaller, regional lenders.
Looking ahead, the Basel Committee recently announced its intention to give banks another four years to continue increased lending levels to maintain liquidity in the housing market. However, by the year 2017 it is expected that market conditions will have improved to such an extent that banks will then have to reduce lending once again to normal levels and retain an increased percentage of their capital to act as a buffer against any possible future financial downturn.
However, it remains uncertain as to what will happen to FLS after January 2014 and, indeed what will happen to the other Government initiatives aimed at stimulating the housing market such as the New Buy scheme which is to end in 2015.
Our expectation is that the impact of the various schemes will gather momentum this year and many lenders have already announced their intention to expand their mortgage loan books in 2013. Increased competition in the market and greater interest in creating niche products for borrowers who have been excluded from the market during the recession will also create wider choice for buyers.
However, the proverbial window of opportunity will not be open ad infinitum and our advice to serious buyers is to take advantage of these newly affordable rates while you still can.
Henry Knight is Managing Director of Springtide Capital