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Round table: Mortgage market facing an uncertain future
Mortgage market facing an uncertain future
Mortgage Introducer’s Paul Lucas hosts a discussion on what’s ahead
The mortgage industry may have fallen on the right side of the COVID-19 pandemic, with house prices rising and the market thriving as people rushed for more space and to escape their city-based lifestyles. Now, however, a new shock is hitting the system: the cost-of-living crisis. Household bills are rising across the board, the Bank of England has hiked rates, and there could be worse to come.
So, how will all of these factors affect mortgages for buyers?
No one has a crystal ball, but Mortgage Introducer did the next best thing and, in association with Barclays, gathered together a collection of experts from eConveyancer, John Charcol, Try Financial, Pure Retirement, and Barclays itself to offer their insights into what we can expect to see unfold.
TOO EARLY TO SEE REACTIONS
The cost-of-living crisis is here. Energy companies are warning that 40 per cent of customers face fuel poverty, and it’s expected to get worse when the price cap is reviewed again in October. The economy has also reached a 40-year high in the rate of inflation, currently at nine per cent, and many commentators feel it will only continue to rise.
However, Nicholas Mendes, mortgage technical manager at John Charcol, says the impact has yet to filter all the way through the system.
“At the moment we’re still seeing property prices going up month on month, but I think … there is going to be an impact when first-time buyers at some point are going to have to look at it and go, ‘do we make the jump now, or do we want to see how things go?’” he said. “Though property prices are increasing so much, their deposits aren’t.”
Try Financial’s senior mortgage consultant Peter Sleigh isn’t so sure there will be any change on the demand side. “It’s too early to say if it’s going to change the mortgage landscape,” he said. “I would say longer mortgage terms are probably going to be requested where they can be, but borrowers and purchasers will still want that mortgage, and want it now. I don’t think the approach by borrowers will change; they will just find it more difficult to proceed.”
That’s not to say trends aren’t already being observed in some quarters. The fascinating part is how things will play out, and head of sales at eConveyancer Sam Kirk has already spotted one change caused by the crisis.
“Anecdotally, we’ve seen more product transfers against remortgages,” he said. “The feedback we’ve got from that is it’s because of affordability, not just because of speed, so we think that’s an interesting trend.”
Offering further analysis was Anna Thompson, strategic distribution manager at Pure Retirement, who focuses on the over-55s who want lifetime mortgages. That demographic has shown a marked change, she explained.
“The biggest difference for us is the increase in cash releases, so our clients are accessing their drawdown facility, and it’s not just the number of clients who are accessing that facility, it’s also the sense of urgency that has shocked us,” she said.
“We’ve seen it in cash releases – the number of requests for escalations increases and increases, so that sense of urgency for customers needing that money to pay bills has increased over the last month or so.”
Keen to stress the need for understanding on the
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part of customers was Barclays director of mortgages Craig Calder. He feels that lenders need to inform buyers about how the changing economy will affect the amount they can borrow.
“The mortgage could be a fixed rate, but who would have been thinking about £200 energy bills a month compared to the £60 they would have been paying a few months ago?” he asked.
“There is enough headroom built into the affordability calculations [for] lenders, but the affordability calculation is still just a number. The reality for a borrower up front is, how do you think you’re going to manage the next four or five years? How do we build in that realism conversation when we’re talking to customers? Because people just see the house that they’ve got their hearts set on, and they might not think about the cost.”
AFFORDABILITY CRITERIA HAVE TO CHANGE
Whether lenders will review their affordability framework isn’t so much a question as a statement. The discussion point that everything hinges on is how significant the changes will be and what others are yet to come.
For Calder it’s about staying updated and making sure any lending decisions include the correct costof-living calculations. He said, “Some will argue, ‘Is it a blip?’ I can remember someone telling me COVID was a blip in March 2020, and it would only last three months, and it would all be gone. Is inflation a blip, or is it going to be here for one, two, three, four, or five years? It takes a long time for inflation to come down again, and when you are approaching double digits, it’s going to be there a while.”
Kirk has already started encountering disappointed buyers following crushing meetings with their brokers.
“We’re seeing a greater timeline between quote and instruction for conveyancing, and a lot of feedback from that is saying that customers are having that
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appointment with the broker and probably not getting the news that they were expecting around how much they could borrow,” he said. “So I would probably argue that lenders are already changing affordability, and that impact is already being seen.”
What may also catch the public out is that affordability will become a rolling target. They might get to grips with particular criteria, only to see things change shortly afterwards without much warning. Mendes sees this area as key. “It’s only fair and expected that more and more lenders will jump on to make changes to reflect the cost of living,” he said. “What will be interesting is how readily they decide to update it – whether they do it on three months, or six months, or yearly.”
Of course, affordability tightening is a two-sided coin. From the buyer’s viewpoint it may seem like it’s being made more difficult to obtain a property. In the lender’s eyes, it’s about being more responsible and prudent. Sleigh offered his take on how both sides could reconcile these changes, with brokers holding the key: “If you’re the borrower, it’s more difficult. If you’re the lender, it’s more appropriate, and that’s where brokers come in and have the relationship with the clients to say, ‘You know this is how it is, and it’s not about the rate you’re paying today; it’s whether you can stay in your house for the long term.’”
PRICING RESILIENCE
Recent market conditions have pushed prices up, as there are not enough properties to match demand. While getting a mortgage has already been affected by the cost-of-living crisis, house prices have remained immune so far. There are contrasting views on whether this will continue unabated, or change is over the horizon.
“Valuers are curving the price increase; we’re getting lots of feedback of down valuations and problems in the chain because of down valuations,” said Kirk. “I think valuers are taking charge of the situation and plateauing it for all of us.”
Calder feels this could highlight the naivety of some borrowers. “Is it a down valuation, or is it the [real] valuation? Is it the person who put the property on the market, or the person who thinks when they’re doing a remortgage that their house is the best one on the street because they’ve got the nicest garden, they’ve got the conservatory, and they’ve just done a new kitchen? It’s about being realistic,” he stressed.
Calder also thinks property prices will continue to go up, but not by as much as we have become accustomed
NICHOLAS MENDES
to. “I think they will just flatten,” he said. “You’ll see modest growth, and you won’t see the eight, nine, 10 per cent growth that we have been seeing.”
Mendes is also in the slowdown camp. The pandemic created momentum by pushing prices higher, but he believes the brakes will be applied sooner or later. “Why we saw prices increase last year was deposits, accidental savings, and low interest rates and everything else – it was a booming market,” he said. “I just can’t see that continuing, and I do think there will be a slowdown. Year on year, I think there will be just a small increase.”
For Thompson the situation is different, as she deals with a specialised part of the market, the over-55s. “Demand is still high, and there does seem to be little stock available – that is the overriding theme,” she said. “We haven’t seen as many down valuations recently as we did last year and the year before, but we operate at much lower LTVs than standard mortgage lenders. We’re seeing more max borrowing and a lot more confidence at that higher-LTV space, which for us is no more than 55 per cent, depending on age, so we’re still quite low in comparison to the mortgage market. But it does show confidence in the housing market generally.”
Sleigh, meanwhile, highlighted just how tricky it is to get a firm grip on such a rapidly changing situation. “We’re in uncharted territory with a war in Ukraine and the recent pandemic, and the longer this continues, the less immune the market is going to be. But demand still outstrips supply; as long as that continues, who knows how long it will last? Probably not quite as long as some people think, is my guess.”
FIXED-RATE SUPREMACY
It’s the old chestnut debated by every buyer with a furrowed brow: Should they get a fixed rate, or roll the dice and opt for a variable rate? The decision has become even more critical in the wake of the BoE rate rises, and, with more expected, has resulted in a surge in those opting for fixed-rate mortgages. But while that could be the safe choice, it’s not necessarily the best one.
Sleigh is not too perturbed about this. He reckons it will be business as usual despite all the polemic news reports flying around. “In our experience, fixed rates have been the clients’ preference for quite a number of years. So far with the pandemic, when rates came right down, everybody could see they were only going to go one way. We haven’t seen any preference for variable rates, and don’t expect to see any preference for those in the foreseeable future. Fixed rates seem to be the norm at the moment, and it’s just about how long clients prefer to be tied in for, and that’s down to their own individual circumstances.”
Mendes is willing to consider a more maverick path in the current climate. His take on the decision comes down to what the customer thinks may be about to happen. “At the moment I would say there are a lot of tracker rates that are still a percentage lower than fixed rates, so I think it’s more of a question of, do you see the base rate going up by a per cent and a half in the next year or so?” Based on this dilemma, he sees a gap that lenders could fill: “I think most clients are probably edging towards doing a fixed rate. What would be really interesting is if lenders do things like 10-year fixes and no ERCs after five years. That would be a nice introduction to the market and give more homeowners that level of stability without being tied in.”
Engineering new products is also a line of thinking that resonates with Thompson. While Pure Retirement only offers fixed rates, there is a trend that’s coalescing around trying to find a middle ground. “What’s interesting for us is we’ve come from a market that’s seen a lot of variable ERCs, and we’re now moving towards fixed early repayment charges,” she said. “All of our plans have fixed ERCs available, and they start
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at eight years, then 10, and then 15. We’re seeing a preference for that, I think just for clarity and for security.”
As far as Kirk is concerned, the proof is in the pudding. “You’ve only got to go back 10 years to see probably around only half of mortgages were done on fixed rates, and now it’s up in the high 90s, so it’s not my job to say whether it’s the best option, but that seems to be what people are generally going for,” he said.
Kirk also discussed a synergy he sees with the energy market, as bills have shot up and sent panic through many households. Prior to the current cost-of-living crisis, very few consumers fixed their costs, and just switched providers based on the best tariff available. “People are desperate to see their energy tariff on fixed rates, and will that go across to mortgages? It will be really interesting over time to see whether the two-year and five-year now become a five-year and a 10-year as the more prudent options,” he said.
In an era when information is so readily available, there are too many armchair experts. And Calder believes some borrowers fall into that bracket when deciding what option to choose. “Someone is always going to think they can call the market more than the professional adviser sitting in front of them, or they have read something, and because there is a differential between the base price of a fixed rate and the spread over BoE base rate for a tracker rate. It’s hard to know how a customer will predict that as we go forward.”
The post-pandemic effect also means many people no longer have certain costs that burdened them previously, such as travel costs. Calder is concerned that they might overestimate their purchasing power.
“A lot of people have more discretionary spend since the pandemic because they are not commuting, but actually, everything is going to get more expensive, so fixed could be the way to go for most people from an
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advice and a personal choice point of view,” he said.
RETURN OF NO-DEPOSIT MORTGAGES
It wasn’t very long ago that 100 per cent LTV products were on offer, and that went a stage further with 120 per cent LTV available too. With property prices on an upward trajectory that is expected at worst to only slow slightly, could this be the time to return to nodeposit deals? The contrasting views from our round table proved how divided the industry is on this topic.
One proponent is Mendes.
“I’m not going to say no [to 100 per cent LTVs],” he said. “I’m always going to say yes, as anything that’s going to help any individual get on the property ladder is always going to be a benefit in the longer term.”
However, he isn’t gung-ho on the matter, and is mindful of the problems that arose with 100 per cent products. He suggested using energy-efficient homes to iron out some of those issues. “For example, [regarding] sustainable homes or EPCs, what would be really useful is if more homes were built that had an A or a B [rating]. If lenders were going to encourage developers but also encourage different types of products and more sustainable homes with better EPC, your household bills typically would be less. Things along those lines, I think, would be really useful.”
Kirk is also in favour of seeing 100 per cent mortgages return to prominence. His analysis centred on the wellworn issue of buyers being able to afford the monthly payments as they often pay more per month in rent but don’t have the ability to save a large enough deposit. He thinks support is needed outside of the private sector.
“What I’d like to see is whether lenders are finding a way to help customers in that situation – and if lenders are doing it, the government should be doing it as well, and there needs to be more action there to help those who are clearly able to service a mortgage but aren’t able to save for that deposit,” he said.
Thompson is encountering that same issue but at another stage of the process, as all her clients are in later life. They often step in to help their younger relatives overcome the tricky down payment hurdle.
“We’re seeing a lot of gifting for deposit purposes, giving to grandchildren and to children, to try to get [them] on the property ladder,” she said. “From a personal opinion, on the 100 per cent LTVs, we still have people suffering from the last time we did that, so it does feel like that is a risky way to go.”
Sleigh is more firmly against 100 per cent LTV,
although he believes it could have a role to play in limited circumstances. “Maybe – and this could be controversial – just for first-time buyers, as they typically stay in their home for five or 10 years,” he said. “Lenders could consider reintroducing interest-only for a short period to get them through the difficulties of their first home and the current high cost of living.”
The major condition for that scheme, however, is educating buyers on the complexity of their mortgage so they don’t misunderstand what they have agreed to. He said, “[It could work] as long as all parties, and particularly the client, are aware of the risk of interestonly, which years ago they weren’t, and they know at some point it will have to be changed to repayment.”
Calder believes 100 per cent products can make some buyers complacent. “The only person taking a risk is the lender, not the customer,” he said. He has seen clients apply for mortgages while displaying spending habits that did not align with their goal of buying a property.
He added: “There is a bit of that commitment to wanting to get on the property ladder as well and finding the right solutions. It could be different, such as part of your mortgage is on 40 years, but part is only on 20 years, so you accelerate your equity growth because you’re building more equity into a sub-loan in the mortgage. It’s about how you construct it differently as opposed to defaulting to, ‘Let’s just lend to you at 100 per cent of the value over the next 40 years.’”
Calder said that, from a lender’s viewpoint, it would make a big difference if first-time buyers were more educated on what they needed when they approached a lender. This would apply to things like preparing their payslips, maintaining good credit, and having a handle on their budget. He believes there is not enough appreciation of the fact that the homebuying process doesn’t begin by sitting down with a broker. It actually begins years earlier with self-preparation.
Sleigh backed up those sentiments. “That’s something I completely agree with and [that] maybe should even be incorporated into the school curriculum in the last year of school,” he said. “It’s such a big decision to buy a house and finance it, and when you leave school, you’ve got no idea.”
WORDS OF WISDOM
It’s not just buyers and sellers who can benefit from sharpening their minds or approach. Brokers also can take advantage of the changing landscape to maximise their performance. Our panel of experts was happy to “Rounding is the bane of a lender. If you think someone earns £25,000 but they actually earn £24,450, that’s not £25,000. If their council tax is £210, don’t make it £200”
CRAIG CALDER
suggest ways in which brokers could be more effective.
For Thompson it was simple. “Explore all options,” she said. “There’s so many variations on mortgages, including lifetime mortgages, and the options that are available to clients now in the later-life space are vast.”
Kirk wants to see brokers take things a stage further and keep hold of the reins. “Don’t stop at the mortgage; take control of the conveyancing to provide peace of mind to the customer and much-needed control for the broker,” he said.
Calder would like to see clarity. “Rounding is the bane of a lender,” he said. “If you think someone earns £25,000 but they actually earn £24,450, that’s not £25,000. If their council tax is £210, don’t make it £200 because you don’t have the time to look it up.”
A similarly practical approach is suggested by Mendes. His first concern focuses on how to deal with clients when they begin the process. “Managing expectations is probably my thing,” he said. Secondly, he encourages brokers to make the application process smoother. “It’s about preparing the client beforehand for what’s needed – some of the brokers don’t prepare their clients enough to get payslips or bank slips, especially first-time buyers, because if a rate does change you get very little notice, maybe only a day, and then going to a client to get everything straightaway doesn’t look good from a service point of view,” he said.
Industry veteran Sleigh, who has seen it all, wants brokers to be ready to go beyond their professional expectations, as buying a home can involve a roller coaster of feelings for many people and their families. He said, “Be patient. Explore all of the options, [pay] attention to detail, and just be as helpful as you can. Sometimes you are an emotional shoulder to cry on, not just a broker, so you’ve just got to help [clients] in every area.” M I
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