Market Comment

April 2013.

Mortgage Market Update.

April has been dominated by the death of Margaret Thatcher. Is the “downgraded Chancellor” going to be as think skinned as his heroine in the coming months?

Hopes that the UK economy is emerging from its post-recession torpor were boosted as it emerged that last month house sales were at their highest in three years and consumers shrugging off miserable weather to keep high street activity buoyant. The Royal Institution of Chartered Surveyors (Rics) said there was evidence that the Bank of England’s funding for lending scheme – which provides incentives for banks to increase the flow of credit – was having an impact on the housing market and boosting trade for estate agents. Sales of homes averaged 17.4 per firm in the first three months of 2013, little more than half the number of transactions in the pre-recession boom but the highest since March 2010. Estate agents reported that confidence had been slowly returning since the end of 2012, with sales up for three successive months.

Britain’s dormant economy has slipped from the grasp of a triple-dip recession with just 0.1 percent growth in the first quarter of the year, according to a forecast by the National Institute of Economic and Social Research think tank. An improving service sector and better-than-expected performance by the production industries look likely to have pushed the UK just out of negative GDP territory, though the future remains clouded by economic uncertainty. “Production sector output picked up sharply in February 2013, but this was largely a reversal of the sharp drop in output in January,” said the NIESR’s GDP forecast for the three months ending 31 March. “Our estimates suggest that both production sector output and the broader economy were broadly flat in the first quarter of this year.”

Fears over a triple-dip recession were ignited after the economy contracted by 0.3 percent in the final quarter of 2012, amid zero growth from the service sector, which accounts for three quarters of GDP, and falling oil production from the North Sea.

The Bank of England held off from injecting more money into the economy and kept interest rates at record lows in April, after stronger economic data suggested the country would avoid a triple-dip recession by a whisker. Rates remained at just 0.5 per cent and the Bank’s nine-strong monetary policy committee voted against firing up the printing presses to expand the quantitative easing scheme beyond its current £375billion level.

However, the outlook is still so gloomy that money markets forecast a rise in the Bank Rate from 0.5 to 0.75 per cent is still five years away - projecting rates will go no higher before March 2018 - while economists think another injection of stimulus cash looks ever more likely.

In the Budget, Chancellor George Osborne announced new measures to give Mark Carney, who is set to become governor the Bank of England from July, more control. The measures include increased flexibility to use ‘unconventional’ measures to support the recovery - but Carney will still have to meet a 2 per cent inflation target.

Inflation crept higher between January and February, hitting 2.8 per cent as households forked out more for rising energy bills and the weak pound made imported goods more expensive. The rise means that inflation is now even further above the Bank of England’s notional 2.0 per cent target and economists are warning inflation could hit 3.5 per cent by the summer. Yet with the Bank of England having signalled that growth needs to be boosted, this inflation rise will have little impact on the outlook for interest rates. There was even a recent comment from a top Bank official that negative interest rates might be an option to kick-start the economy - a suggestion which prompted a flurry of activity in the swap markets that forecast future rate trends.

Unsurprisingly, swap rates fell in reaction to the Bank’s signal that the longstanding 0.5 per cent rate might not represent rock bottom after all, and that -0.5 or -1 per cent was within the realms of possibility. However, they have staged a partial recovery since the Bank’s intervention.

In The Budget George Osborne announced the Help to Buy scheme, which is aimed at helping all buyers – not just first-timers – step onto or up the property ladder. Huge funding increases for the Build to Rent scheme have also been announced. The newly unveiled Help to Buy scheme will give all home buyers the ability to borrow shared equity loans of up to 20 percent of a new build’s value. Previously, only first-time buyers had access to these interest-free loans, as part of the older NewBuy scheme.

New and current home owners alike will be able to put down five percent and borrow an extra 20 percent interest-free, in order to bolster their deposits. This 25 percent deposit will allow home buyers to get better value mortgages with lower monthly repayments. The loans are available for properties up to a value of £600,000.

A Mortgage Guarantee is also to be introduced, which is designed to help tenants buy their homes. The scheme will allow mortgage lenders to give loans to people who wish to buy their home but have little or no deposit, because they’ll be backed by the Government’s balance sheet.

The Build to Rent scheme is also set to receive a significant funding increase, up to a whopping £1 billion, from just £200 million last year. This increase will allow for a massive rise in the number of houses built across the country, particularly in areas with a notable shortage in housing.

Another £225 million has been pledged for building new homes under the Affordable Housing Guarantee program, which will help to build around 15,000 new homes, starting from 2015.

The changes and funding increases throughout the property market are aimed at stimulating the economy. By allowing people to buy homes, who weren’t in a position to do so previously, more cash will be injected into the economy. Increasing the number of privately-rented homes under the Build to Rent scheme will also boost the economy and provide more housing in areas that may previously have been lacking. The increasing number of new builds will also create jobs for construction workers and others in the industry.

Analysts called the new “Help to Buy” scheme a “game-changer”, but warned it could trigger a sudden rise in house prices. Robin Hardy, analyst at Peel Hunt, said the move would boost house builders’ earnings as well as driving house price inflation.

Noble Francis, economics director at the Construction Products Association, called the Help to Buy scheme a “game changer”. “This should feed through to a major expansion of house building over the next few years, especially in key areas of demand like London and the southeast where raising a deposit has been an issue.”

One of the major crackdowns within the mortgage market has been related to the provision of “Interest-Only” mortgages. As many major lenders pull out, the FCA fears it may become impossible for ordinary people to get an interest-only mortgage. So many major lenders have pulled out of interest-only mortgages that the regulator is worried consumers could suffer. The exodus from these loans, which allow home buyers to only repay the interest each month, has been sparked by a crackdown on affordability checks, due to come into force next year.

However, the new Financial Conduct Authority (FCA) is concerned that too many lenders have abandoned them, or made them impossible for ordinary people to get.

In his first comment on the matter this month, the head of the FCA, Martin Wheatley, said: “There are two sides to the risk equation – consumer detriment arising from the wrong products ending up in the wrong hands, and the detriment to society of people not being able to get access to the right products.”

HSBC and Yorkshire building society are the latest in a raft of lenders to restrict interest-only mortgages. They pulled out of the market for new borrowers last month, though HSBC will accept interest-only borrowers with an income of over £100,000 or £50,000 in savings with the bank. They join Nationwide, NatWest, RBS, Coventry building society and Newcastle building society which stopped accepting new applications for these loans last year. Lenders have acted ahead of new rules which come into force in April 2014 to ensure that plans to repay the loan are credible, following concerns that during the property boom some buyers took on interest-only loans without making provisions to cover their borrowing.

So, what action should borrowers be taking presently. Well, with a number of lenders having raised their Standard Variable rates over the last few months, there is absolutely no sense in sitting on your lenders SVR, especially with the competitive Tracker and Fixed rates, such as a five year fixed rates below 3% (some with the legal and survey costs borne by the lender) currently available, However with the extremely vigilant underwriting taking place currently now is also not the time to be dabbling with lenders that you are not familiar with. Now, more than ever, the role of an experienced mortgage broker is extremely important in being able to identify lenders that are not only offering competitive interest rates but those that will actually lend.

You may have to pay an early repayment charge to your existing lender if you remortgage.

Your home may be repossessed if you do not keep up repayments on your mortgage.

A typical fee for arranging your mortgage is 1.5% of the loan amount.

For more personalised comment and for advice about your own mortgage requirements do please pick up the phone and call one of our team on 020 7930 7242 or email one of us having read our profiles on the “about TMM” pages on this site.

Simon Tyler, 15th April 2013.