If 2014 saw the mortgage market accelerate at break-neck speed in a bid to return to something approaching the levels seen before the credit crunch, 2015 is expected to witness a slamming-on of brakes.
While predictions for the market put it far from the doldrums experienced immediately after the financial crisis, some of the thrust is expected to go. Lending is forecast to rise but at a much slower rate than in the previous two years while the housing market is expected to ease its foot off the gas, although not sufficiently to send it into reverse.
Meanwhile, the soothsayers do not predict an interest rate rise any time soon so low mortgage rates are expected to remain in place for the foreseeable future.
Figures from the Council of Mortgage Lenders are often regarded as the market’s official predictions. The trade body expects gross mortgage lending of £222bn this year – compared with an estimated £207bn in 2014 – which would represent a 7 per cent rise, while lending in 2016 is predicted to reach £240bn – an 8 per cent annual rise if the 2015 prediction proves correct.
This would be considerably down on previous years’ increases. In 2014, gross lending jumped by 18 per cent, following an even larger 21 per cent leap the year before.
Of course, 7 per cent still constitutes growth and is in line with the trend of an expanding market, although we are still way off the £363bn of lending in 2007. Yet given that was achieved during a period of 125 per cent loan-to-value mortgages and lending to people deep in the mire, some may regard 2007’s large figure as the product of fat cats lusting after the scent of money, rather than doing good for society.
The CML says the recovering economy was a big driver of increased mortgage lending in 2014. Britain’s economy last year was expected to be worth a total of £1.86tn – up from £1.63tn during the previous 12 months. Meanwhile, Lloyds says consumer confidence is at its highest level on record, according to the bank’s latest Spending Power Report.
However, the lending impetus has faded in recent months due to a cooling housing market, which led to fewer properties bought. CML statistics show there were an estimated 1.23 million residential properties bought in 2014 – a 14 per cent rise on the 1.07 million in 2013. However, the trade body expects a lower figure of 1.18 million in both 2015 and 2016.
But this is not a big enough drop to feed a reduction in mortgage lending, especially given that the CML also forecasts a drop in the number of cash transactions from 36 per cent of all sales in 2013 to about a third this year.
Tighter lending criteria, which came as a result of the Mortgage Market Review, may also play a part in stifling the lending boom. In fact, one of the reasons for rock-bottom rates late last year was not just that expectations of a Bank of England base rate rise were put back but also because lenders were behind on their targets, which led to a price war to drive business.
Concluding its forecasts, the CML says: “Looking ahead over the next two years, housing and mortgage market developments appear well supported by relatively favourable economic fundamentals.
“However, prudent and sustainable lending in the face of ongoing affordability pressures will necessarily limit the further upside scope for mortgage lending.”
John Charcol senior technical manager Ray Boulger says: “I expect gross lending to increase in 2015 but by a smaller percentage than in 2014. My forecast is that 2015 gross lending will be £225bn.”
The effects of the MMR – which were felt even before the criteria rule changes were implemented in April as lenders knew what was coming – led banks and building societies to become more picky but Boulger thinks things may get smoother for borrowers this year.
“I expect to see some movement towards improving over-zealous criteria and one area in particular crying out for, and likely to see, change is lending to older borrowers,” he says.
Andy Knee, chief executive of conveyancer LMS, says: “With a clearer understanding of the MMR and encouragement from the FCA, lenders want to increase business and not be overly restrictive. Now the systems are in place, lenders will look to increase volumes.”
Another factor that could hamper the number of transactions is May’s general election.
“With the housing market, very little is likely to happen in 2015 until the general election is over,” says Mark Harris, chief executive of SPF Private Clients.
“The uncertainty surrounding the election could mean the market continues to stagnate in the early part of the year. However, once the outcome is known, we expect the housing market to be buzzing as pent-up demand from the start of the year is released.”
London & Country associate director of communications David Hollingworth says: “There are some uncertainties given that the election could temper consumer confidence. However, with low rates, strong lender competition and changes including stamp duty, lending should increase slightly.”
An issue likely to feature in parties’ election campaigns is housebuilding, with many saying a shortage of affordable homes has fuelled the surge in house prices, which makes it more difficult for first-time buyers to get on the housing ladder.
The most recent Government statistics show the construction of 139,000 homes in England began in the year to September 2014 yet many insist 250,000 homes need to be built every year to keep pace with demand.
Knee says: “My wish for 2015 is whichever party wins the election takes action to get Britain building.”
Of course, the housing market itself will have a big effect on the mortgage market. The latest Nationwide House Price Index shows prices were up 7.2 per cent in 2014 although the pace of growth softened during the second half of the year, reaching just 0.2 per cent in December.
Boulger expects the rate of growth to continue to be modest in 2015. He says: “Prices will continue to increase in 2015 but the year-on-year rate of increase will progressively fall over the year to 4-5 per cent by the end of the year.
“Regional variations will be smaller in 2015 as price differentials narrow.”
By regional variations, Boulger is referring to the booming London market where prices grew by 17.8 per cent in 2014 – way above the overall average – which played a huge part in the national rise.
Estate agent Marsh & Parsons expects a more gradual 3-5 per cent increase in the capital this year. Chief executive Peter Rollings says: “The curtain certainly isn’t going down on price growth. Demand for prime London property remains stable.”
The base rate is another key factor in the performance of the mortgage market. There have been several false dawns over the previous few years where many have anticipated a base rate rise.
In early 2014 it seemed certain we would see the official borrowing rate rise in the autumn but this proved an ill-judged prediction by many.
The latest consensus from some quarters is a potential gentle rise towards the end of 2015 but this is nearly impossible to predict.
Boulger believes the next increase in base rate will not arrive until 2016 at the earliest.
He says: “Bank rate is unlikely to rise in 2015 but the trigger for gilt yields, and hence swap rates and the cost of fixed-rate mortgages, to rise will be when market sentiment changes regarding the timing and/or speed of Bank rate increases. The cost of fixed-rate mortgages will increase before the Bank rate does.”
Whenever the base rate finally moves, the initial upward creak is expected to be gradual.
Director of West One Loans Duncan Kreeger says: “The first increase is likely to be only 0.5 per cent – and possibly 0.25 per cent – so mortgage rates may not be massively impacted initially.”
While economic factors are outside lenders’ control, they can decide when to raise the cost of their trackers and SVRs.
Nationwide head of corporate accounts for group intermediary sales Gary Salter says: “Current mortgage pricing bears little resemblance to the Bank rate. There is a huge variation in lenders’ SVRs and a 0.25 per cent base rate increase may not automatically be added to SVRs.”
Kreeger adds: “There will also be a reluctance among lenders to be the first to increase rates so we could see a game of brinkmanship once the base rate nudges upwards.”
Regardless of what happens to tracker rates and SVRs once the base rate rises, rates for new customers are among the lowest ever seen. At the time of writing, a two-year fix was available at 1.29 per cent at 60 per cent LTV while a five-year fix was on offer at 2.44 per cent, also at 60 per cent LTV.
There was a time when a five-year fix at below 4 per cent was deemed an incredible rate, and then at below 3 per cent – even when base rate was at 0.5 per cent.
When base rate eventually moves, it may lead to a remortgage push with borrowers on variable rates desperate to jump off what could be a vessel sailing uncontrollably into a storm of unaffordable monthly costs.
That ship could even set sail earlier if borrowers believe a rate rise is on the immediate horizon.
“The time to remortgage, if a fixed rate is required, is before the Bank rate starts to rise,” says Boulger. “But as house prices increase, together with regular repayments at lower mortgage rates, with lower LTVs, some mortgage prisoners will have enough equity to make a remortgage worthwhile and others will see their equity increase to a level that qualifies for the best rates.
“Thus remortgaging should also increase from its low level.”
The most recent figures from the CML show 26,600 remortgage loans in October 2014, which is 6 per cent down on the month before and 10.7 per cent down on the same period in 2013.
“There seems to be a degree of apathy towards remortgaging, which may be explained by three factors,” says Salter.
“First, many borrowers have never experienced a rate rise; second, brokers now charge fees (unlike in the early noughties); and third, it may be brokers are busy writing new business, which can make it difficult to also focus on existing clients.”
For both those remortgaging and those buying a new home, what is in store for new customer rates in 2015? Can the market maintain such lows, or go even lower, albeit for those with a healthy deposit or equity?
Salter predicts much of the same this year. He says: “Pricing has continued to fall due to lower swap rates and increased competition between lenders. Given established lenders’ aspirations, together with a number of new and returning entrants to the market, competitive pricing is likely to remain during 2015.”
However, Harris cautions that rates are unlikely to go lower. “Swaps have already edged up but competitiveness among lenders will determine a lot of mortgage pricing this year. They couldn’t really get much cheaper,” he says.
Some upward pressure on mortgage rates could be forced by the price of oil, which has slumped by almost 50 per cent in the past six months. Brent crude, which has averaged $102 (£67) a barrel since the end of 2009, had plunged to less than $60 by the end of 2014.
Boulger thinks the fall, which will keep inflation low, will therefore also help to keep the base rate low.
“I think rates will continue to stay low, with one caveat – unless the oil price rebounds sharply,” he says.
“The rapid fall in the oil price means CPI has further to fall as its effects are not yet reflected in inflation. It is likely to be below 1 per cent for much of 2015 and, although the lower oil price should provide stimulus to the economy, it will be difficult for the Monetary Policy Committee to increase Bank rate when inflation is below its target and much of the global economy is weak.”
Stamp on the market
The stamp duty changes announced by Chancellor George Osborne in last month’s Autumn Statement will also have an inevitable impact on the market in 2015, although there is a divergence of views as to what that will be.
The new system will work like income tax where buyers get a tax-free allowance and then pay a different rate of tax for each portion of the price. There is no tax for properties up to £125,000, then it is 2 per cent from £125,001 to £250,000, 5 per cent from £250,001 to £925,000, and so on.
Under the old system, when a purchaser passed a threshold, they paid the higher rate of tax on the entire property price.
In general, the new system means those buying homes worth less than £937,500 will pay less, and most buyers above that threshold will pay more – sometimes far more.
A key change will affect those buying property priced around the thresholds. Under the old system, a property worth £251,000 would have incurred £7,530 in stamp duty; now it will be £2,520.
“The new system will increase activity in previous no-go price regions, making it easier for some chains to complete,” says Boulger. “This will result in a modest increase in housing transactions but the stamp duty savings most buyers will make will not be enough to have a measurable impact on prices.”
Given that purchasers of seven-figure homes or above will usually pay more, the new system could hinder the upper end of the market, says Harris. Under the old regime, a £1m home cost £40,000 in stamp duty; now it will cost £43,750. Meanwhile, the stamp duty on a £5m home has torpedoed from £350,000 to £513,750.
Harris says: “The changes will hit wealthier buyers hard but it has to be fairer than mansion tax as it’s only a hit that will be taken once. It will fundamentally change the way we view our homes: people will think harder about moving and are likely to stay put for many years.”
Knee foresees short-term gain, which could lead to price rises. He says: “The announcement is set to translate into a rise in activity in the new year. However, into 2015, affordable housing transactions may be offset by a rise in prices propelled by the surge in demand.”
Meanwhile, Salter regards the change as just one piece in a big 2015 jigsaw. He says: “These stamp duty changes alone will not have a significant impact on the market but, combined with Help to Buy, cheap mortgage rates and an improving economic position, it’s one more thing to help build confidence in the market.”
Brokers will continue to be the first choice for most mortgage seekers
Director, Anderson Harris
Last year was an interesting and varied one for the housing and mortgage markets: a strong first six months followed by a tailing-off as potential purchasers started worrying about a possible mansion tax, stamp duty changes and when interest rates might start to rise.
This year is likely to be quiet at the beginning until the election is out of the way, when at least there will be clarity on the mansion tax issue.
While the upper end of the market is likely to take a pause regardless, the mainstream market will continue to motor ahead. We do not expect an interest rate rise as the economy is not in a strong enough position to withstand it, and this will reassure borrowers.
Stamp duty reform in the Autumn Statement was bad news for the top end of the market but, for anyone buying for less than around £1m, it was welcome news. Whatever end of the spectrum people are, the result is a much fairer system, and one that should have been changed years ago.
Lenders started competing on a grand scale towards the end of 2014, slashing their fixed-rate mortgages to new lows, and we expect this to continue into 2015. This should give brokers plenty of products to entice new and existing clients with.
The other advantage for brokers this year is they will continue to be the first choice for most people taking out a mortgage. High-street bank branches are bogged down by the MMR and most lenders would prefer brokers to do the bulk of the work for them.
This suits brokers just fine: while some of the new requirements can be a chore, ultimately we can provide a valuable service for the client that they could not get by going directly to the lender.
One area that could continue to be a problem is the overly strict interpretation of the MMR rules, which resulted in many older borrowers struggling to get mortgage finance in 2014. However, we believe common sense will prevail this year: lenders will interpret the FCA’s rules more sensibly and maybe the FCA itself will take another look and try to find a solution. Something needs to be done: there are too many people who cannot borrow as much as they should be able to.
We also expect more innovation from lenders looking at the issue of interest-only lending and mortgages for the self-employed. This will be extremely welcome and give brokers yet more options with which to help our clients.
Another interesting year ahead
Head of sales
This year promises to be another very interesting one for the mortgage market.
In 2014 we saw a further overall increase in the number of buyers, fuelled by rising confidence in the economy and the availability of credit. However, this does not tell the whole story. This increase was in part driven by activity at the beginning of the year when we saw demand outstripping supply in some areas, and upward pressure on house prices as a result. Also, it was not an even picture across the country and there are still pockets where activity has not been as strong and prices have come down.
In 2015 we are expecting a moderation in growth to around 3-5 per cent but it is likely we will see a more even regional pattern across the UK.
House price growth has been slowing in the past few months and is likely to continue in the short term as a combination of factors spill over into the new year. These include the outlook for the economy, the likelihood of an interest rate rise and weaker housing affordability.
As ever, the fortunes of the mortgage market are aligned with the wider economy and there’s been an easing of economic activity in the second half of 2014, which has been caused by global economic developments. However, economic growth of around 3 per cent is still expected and wage growth is now running higher than inflation. We are also expecting higher levels of housebuilding and the impact of the changes to stamp duty will begin to filter through in the first few months of the year.
We did not see a huge spike in remortgage activity whenever the possibility of an interest rate rise was discussed in 2014. Despite extremely competitive rates at the moment, it may be borrowers will continue to monitor the situation before deciding what they will do.
There are a number of other issues that we believe intermediaries will be particularly interested in this year. The first is what happens in the general election and what the political parties promise in their manifestos. Then there are the final rules for the European Mortgage Credit Directive, which may impact on buy-to-let, and the change in pension rules that will allow people to take a lump sum out of their pot and possibly invest in property.