Key housing market and mortgage forecasts for 2018:
- Housing transactions: 1.25m
- House Prices, (Nationwide Index): + 2%
- Gross mortgage lending: £272bn
- Bank Rate at 31/12/18: 75%
Despite a partial recovery from the 859,000 housing transactions in 2009, current transaction levels remain way below the 1.6m plus of 2006 and 2007 and have been broadly flat since 2014. Nothing suggests a trend change in 2018.
This begs the question of why housing transactions are still over 20% lower than 10 years ago, during which time the UK population has increased by 7.9%. Stricter mortgage regulation, the disappearance of 100% mortgages and large increases in stamp duty are all factors.
Budget changes in Stamp Duty Land Tax for those FTBs in England and N Ireland who meet the Government’s strict definition of an FTB will help. However, saving even a 5% deposit is challenging for many. With lenders not prepared to offer LTVs in excess of 95%, a large cashback is an alternative way lenders could help FTBs. With 5 year fixed rates at 95% starting at around 4% perhaps an enterprising lender might offer a 5 year fix at 5% with a 5% cashback!
Several new lenders are planning a 2018 launch, with new entrants and smaller lenders most likely to provide innovation, particularly in later life lending. Once the FCA has considered the responses to its consultation on retirement interest only mortgages we should see new rules for this sector in the Spring.
One question is where will the minimum age be set. The most relevant factor is the age at which options for obtaining a typical term repayment mortgage start to become restrictive, which suggests the minimum age for an interest only repayment mortgage should be 45.
Once these new rules are known competition for business from older borrowers will increase. However, unless the PRA relents from its current policy of making it expensive, in capital terms, for lenders to offer really long term fixed rates, older borrowers wanting an interest only fixed rate for longer than 10 years are unlikely to be able to obtain such a mortgage in the most obvious way, i.e. with a retirement interest only mortgage.
Those over 55 with adequate deposit or equity will, nevertheless, still have access to an interest only fixed rate beyond 10 years, the route being a Lifetime mortgage and the 10% p.a. ERC free over payment facility, allowing payment of the interest.
As convergence of mainstream and lifetime markets increases it will become even more important for advisers who don’t offer advice in both sectors to at least have sufficient understanding of what they don’t offer to avoid misleading clients by excluding consideration of a type of mortgage which might be more suitable.
One or two 0.25% increases in Bank Rate are likely in 2018, but as much larger increases are now factored in to the mortgage affordability assessment this should not put those who have obtained a mortgage recently under financial pressure.
However, an immediate impact of even a small increase in Bank Rate is likely to be a reduction in the maximum mortgage available to new borrowers. As the FPC requires the affordability assessment in most cases to be based on a 3% increase in the revert to rate any increase in Bank Rate automatically reduces the maximum mortgage available, unless lenders don’t pass on the increase in their SVR or the FPC amends its rule.
A combination of landlords now being subjected to income tax on rental income rather than pro–fit and low growth in house prices is likely to accelerate the trend for highly geared BTL investors to dispose of some properties, despite low mortgage rates.
Combined with the sharp reduction in BTL purchases following the income tax increases, this will reduce the supply of rental property. However, a partial compensating factor is that the sharp reduction in net immigration over the last year has reduced demand for rental property.
One benefit of Brexit is that long term interest rates, as well as Bank Rate, are likely to remain low for at least the next year as a result of continued uncertainty prior to conclusion of the Brexit negotiations, notwithstanding the further increases expected in US rates. Any increase in the cost of fixed rate mortgages is therefore likely to be small.
Product transfer and remortgage activity will increase further as borrowers continue to take advantage of low fixed rates.
Gross mortgage lending in 2017 looks likely to be around £256bn and I expect a modest increase in 2018 to £272bn, driven mainly by remortgaging. With no sign of BTL purchases recovering as the income tax changes increasingly bite and the mortgage affordability restrictions imposed by the PRA restrict the maximum loan, BTL lending will continue to be largely remortgage driven.
Ray Boulger, Senior Mortgage Technical Manager, John Charcol