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Feature: The year in review

Looking back on an eventful year in the mortgage industry, plus the experts’ predictions for 2018

After numerous false dawns, November finally saw Mark Carney, governor of the Bank of England, shake off his ‘unreliable boyfriend’ tag and do what he had threatened for some time: raise interest rates.

A rise of 0.25 percentage points was more a symbolic act than a serious attempt to rein in inflation. For many, however, it spelled the end of rock-bottom mortgage rates.

As expected, many of the big banks used the rate rise as an excuse to increase their standard variable rate by the full 0.25 percentage points, although savers often had to make do with much smaller rises.

However, even before Carney made his move, dozens of lenders had pulled their cheapest deal, their hand forced by rapidly rising swap rates. As a result, the market waved goodbye to the sub-1 per cent fixed rate when Yorkshire Building Society repriced in October.

And, with the BoE threatening to increase interest rates twice more by 2020, possibly to 1 per cent, it is likely that swaps, and therefore mortgage rates, will follow — albeit slowly, according to experts.

Provided employment stays buoyant, mortgages will remain affordable

Coreco director Andrew Montlake says: “I suspect next year will be rather benign where interest rates are concerned.

“The economy is still in a state of flux and, while the gov­ernor of the Bank of England has talked about another possible rise next year, much of this will be predicated on Brexit discussions and their effect on the economy.

“We could see rates 0.25 percentage points higher than they are now by the end of next year, but in all probability we will be in a similar position to where we are now, all other things being equal.”

Nationwide chief executive Joe Garner agrees. Speaking in November he said: “Further interest rate rises are likely to be gradual and, provided employment stays buoyant, mortgages will remain affordable.”

Buy-to-let pain

Although rising interest rates took centre stage in 2017, the star of 2016 — buy-to-let — proved it still had a few acts to play out. As landlords were getting used to paying higher stamp duty, in April the Government introduced its phased removal of higher-rate tax relief. By 2021, the relief will have been removed altogether, meaning many landlords will lose money on their portfolios.

Next, in September, the Prudential Regulation Authority introduced tougher rules for landlords with four or more properties, of whom there are thought to be around 200,000. The changes mean that, every time a landlord looks to buy a new property, they will be grilled on their entire portfolio to check whether they can afford another mortgage.

In response to the new rules, lenders such as BM Solutions and The Mortgage Works increased their rental coverage ratio for landlords with four or more properties, while Coventry BS stopped lending to those who had owned their buy-to-lets for less than two years.

Some lenders, such as Platform, Principality and Santander, even stopped lending to portfolio landlords altogether.

Signs are emerging that the Government’s attack on buy-to-let is filtering through. In September, 6,200 landlords bought new properties, which was down by 3.1 per cent year-on-year, according to figures from UK Finance. Meanwhile, remortgage cases rose by 6.1 per cent to 12,200, suggesting landlords were not yet selling off portfolios in their droves but were not adding to them either.

Some commentators think buy-to-let lending will plummet by a fifth in the medium term. This is probably what George Osborne, the former chancellor, had in mind when he dreamed up the policy.

Savills, the estate agent, predicts the number of buy-to-let purchases will fall from 75,000 this year to just 55,000 in five years’ time. Savills residential research director Lucian Cook says: “Mortgaged buy-to-let investor numbers are forecast to fall most dramatically. We have seen the earliest signs that some mortgaged buy-to-let investors may be selling stock.

“Those entering the market will be looking very carefully at yields, putting the spotlight on urban markets outside the capital.”

Mortgaged buy-to-let investor numbers are forecast to fall most dramatically

Trinity Financial communications director Aaron Strutt says: “The Prudential Regulation Authority’s buy-to-let changes, coupled with the tax changes, have hit the market hard, and the reduction in business has been quite incredible.

“Lenders were reporting huge drops in buy-to-let business and many brokers have seen massive reductions in the residential/buy-to-let split. We still speak to clients who want to purchase investment properties, but nowhere near as many.”

Proc fees

However, while landlords were put under even more pressure last year, brokers and the elderly had something to cheer about. After years of campaigning by Mortgage Strategy, lenders finally relented and began paying procuration fees for product transfers, albeit these were not quite the full amount brokers received for new business.

Recently, NatWest followed the likes of Accord, Nationwide and Skipton in changing its stance on retention proc fees.

Older borrowers had cause to cheer in September when the FCA set out plans to bring back retirement interest-only mortgages. These loans allow pensioners to pay the interest on their mortgage until death, meaning they do not have to take out an expensive lifetime mortgage, which was welcomed by brokers.

Budget promises

The biggest news of recent months came during the Budget in November, when Chancellor Philip Hammond announced the permanent abolition of stamp duty for first-time buyers purchasing homes worth less than £300,000.

The move means that, for homes worth up to £500,000, FTBs will have to pay tax on just the last £200,000.

The stamp duty change is a nice gesture but it’s not the silver bullet that’s going to open up the property market

Hammond promised to “revive the homeowning dream in Britain”, adding that the move meant eight in 10 first-time buyers would no longer pay stamp duty.

However, the Office for Budget Responsibility predicted just 3,500 extra FTBs would be enabled to buy as a result of the measure. It also said the stamp duty exemption would push up prices by 0.3 per cent by the end of next year and FTBs would simply use the boost to “buy properties that they otherwise could not afford”.

Experts agreed that the move would simply line the pockets of so-called second steppers.

Open University Business School True Potential Centre for the Public Understanding of Finance director Martin Upton says: “This is a nice gesture but it’s not really the silver bullet that’s going to open up the property market for those who can’t get in.

“In the grand scheme of things this is a small saving and it doesn’t address the biggest problem of the deposit required to make the move.”

However, Hammond attempted to address the fears that house prices would spike by announcing plans to spend £44bn on tackling the housing crisis. He said he wanted to build 300,000 homes a year by the mid-2020s, but experts remain sceptical.

National Association of Estate Agents chief executive Mark Hayward says: “While we welcome this news, we have historically had these announcements from government to accelerate housebuilding, which has not been delivered.”

With promises of a housebuilding revolution, further pain on the horizon for landlords and the potential for rising mortgage rates, 2018 looks certain to be just as eventful as this year has been.

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