Base rate rises and confidence could fall

Business has boomed this year, a fact highlighted by the June len-ding figures released by the Council of Mortgage Lenders.

A staggering 32.2bn was advanced in June, smashing the previous record of 29.1bn set the previous month.

This is great news for the intermediary sector which continues to take responsibility for a large slice of len-ders’ business.

The confidence that was so lacking in early 2005 returned in the latter half of the year and has continued and strengthened during 2006.

This confidence can be seen in house price indices with Halifax reporting a rise of 0.2% in July and revising its forecast for house price inflation this year from 3% to 5%.

This is not a runaway figure to strike fear into the hearts of those who continue to worry about a crash, but affordability remains an issue for borrowers.

In fact, Nationwide points to the fact that toughening affordability has not yet bitten due to a combination of loosening lending criteria and a burgeoning buy-to-let sector ready to take up the slack.

But it points out that stiffening affordability should not be ignored and could be an alarm bell that won’t stop ringing.

Other figures show there may be reason to be a little less optimistic on how the mortgage market will progress towards the end of this year.

The CML recently released figures on the rising number of properties being re- possessed. The level of repossessions is now at its highest since the first half of 2001 and has risen significantly since last year.

The increase in the base rate looks likely to affect affordability further, and in turn the re-possession figures. So there are signs the market will not continue quite so strongly for the remainder of the year. We will have to see how hard confidence is hit by the rise in the base rate.

Having said that, it’s not all gloom and for many a 0.25% rise is unlikely to cause concern. Many borrowers have protected themselves with fixed rate mortgages which will insulate them from rate fluctuation.

In the short term a rise in the base rate can lead to increased business volume by kick-starting some borrowers into action as those who have not reviewed their mortgages for some time are stimulated into shopping around.

While the market powers ahead there is no room for complacency and crucially we will have to see how hard confidence is hit.

David Hollingworth is mortgage specialist at London & Country