What lies ahead? A lender’s perspective
Written by Ingard
Contributors: Peter McGuinness, CEO of Bluestone Mortgages; Keith Barber, Director of Business Development at The Family Building Society; Ross Turrell, Sales Director at Fleet Mortgages; Terry Jordan, Head of Marketing at RBS; Louisa Sedgwick Director of Sales – Mortgages at Vida Homeloans.
The big questions clouding the industry over the past 12 months have been surrounding how Brexit negotiations will impact the mortgage and property market. To help to shed a little light on what direction lenders may intend to take in the next few years, in terms of products, criteria and outlook, we’ve hosted a discussion with both high street and specialist lenders to provide you with the burning answers which may impact your business in the years to come.
How do you think the base rate will move in the next 2 to 3 years?
Ross Turrell, Fleet Mortgages: The future is looking very interesting, with Brexit on the horizon the Bank of England will be looking to create stability, as a result interest rates will remain as they are (current Bank of England yield curve support this view) in the near future due to uncertain times ahead.
Keith Barber, The Family Building Society: The answer is, it depends. Six months ago we all thought the Fed in the US would lead the way with a series of rate rises starting 14 June, now that seems less likely. The Bank of England has said it will ignore inflation, normally the trigger for higher rates, as it’s short-term caused by exchange rate changes. We could easily continue to have low rates for some time to come.
Louisa Sedgwick, Vida Homeloans: It’s unlikely we will see a great deal of movement in the Bank of England bank rate over the next two to three years. The mortgage market is still ascertaining the new ‘norm’. We have seen one or two individuals of the MPC vote to raise interest rates, however as they remain in the minority against what is still a fairly unstable economic background, the expectation is that rates will remain static for the foreseeable future.
Terry Jordan, RBSIP: We are at the bottom of the interest rate curve with little opportunity for rates to go anywhere but up. Whilst the economy is uncertain as a result of Brexit and the General Election, my short term forecast would suggest base rate remaining the same but over a two to three year time period the likely trajectory would be a slow increase into the 1% to 2% range.
Peter McGuinness, Bluestone Mortgages: With the base rate at an all-time low, it is not unreasonable to think that the Bank of England may increase rates over the next couple of years. The decision to hold the base rate over recent months, coupled with prolonged market uncertainty, could cause many mainstream lenders to further tighten their lending criteria, excluding responsible applicants from the mortgage market. Specialist lenders, therefore, have an important role to play to ensure borrowers are assessed on a case-by-case basis and are offered appropriate, affordable loans.
How will lending in the adverse sector of the marketplace evolve in the next 2 years?
Keith Barber, The Family Building Society: With the economic fallout from Brexit, and a number of new entrants to this market in recent times, it’s a sector that’s set to increase. We’ve recently seen Barclays have relaxed their criteria in this area.
Louisa Sedgwick, Vida Homeloans: As we know, utility companies and mobile phone providers are getting more proactive in managing customer account arrears, leading to an increase in CCJs registered, a great example of which is the uplift in 2016 to 900,000 CCJs registered (from 700,000 in 2015). This means that more customers will be affected and will have to turn to lenders who specialise in adverse lending. We are seeing a greater level of innovation coming from the specialist lenders who are keen to support borrowers who may not fit the high street. This is the area I think where we will see more growth – non ‘mainstream’ customers being in a position to buy their own homes.
Terry Jordan, RBSIP: As the economy continues to remain strong and unemployment rates low, more lenders will be encouraged to review their stance on the adverse sector. As such, niche lenders will be growing their lending to support this sector.
Peter McGuinness, Bluestone Mortgages: We expect to see an increased use of credit score models to assess customers with adverse credit history, particularly from higher volume lenders. This may assist develop certain segments of the specialist lending market but fundamentally many good quality applicants are likely to continue to find it difficult to access credit.
Bluestone is at the forefront of a lending industry that is catering to a growing number of people who are currently unable to access credit. With the recent growth in the supply of specialist lending products, and the increased awareness and confidence of both intermediaries and consumers, we expect to see steady growth.
What impact will the uncertainty of Brexit have on the mortgage market and the economy in general?
Ross Turrell, Fleet Mortgages: We are already seeing ‘part-time‘ landlords sitting on their cash during this period of uncertainty, taking the view that if they do nothing, they will be no worse off than they are now. However, the professional and semi-professional landlords are still active with a high proportion of purchases transacted through a Limited Company structure
Keith Barber, The Family Building Society: Uncertainty about the future tends to dampen activity, as we saw last year after the vote to leave the EU. Housing transactions are fewer than they used to be and more are financed by cash, particularly in the buy to let sector. To keep business levels up, brokers need to pay more attention to remortgages and product transfers than has been the case in the past.
Louisa Sedgwick, Vida Homeloans: We often see minor ‘blips’ before a General Election, whilst borrowers take a break from looking for their new home or switching mortgage lender. The Brexit announcement had a similar effect, however, the bottom line is that people still need a place to live and lots of them still need finance options to enable them to do so. As we arrive at the point of Brexit, we may see further consumer nervousness, however, only time will tell.
Terry Jordan, RBSIP: The economy and mortgage market doesn’t like uncertainty and this tends to dampen customer demand. The house purchase market is likely to remain subdued whilst the growing noises around remortgages are likely to prompt SVR customers to act.
Peter McGuinness, Bluestone Mortgages: It is probably too early to diagnose any long-term effects, but so far Brexit has not dampened borrowing activity in the UK mortgage market and the economy has weathered the storm relatively well so far.
Do you think there is an appetite for interest only lending and under what circumstances?
Keith Barber, The Family Building Society: Yes, we’ve seen some lenders return to this space. Borrowers need to be realistic about how and when they will pay back their interest only loan. Brokers have a role to play in this, challenging the assertion “we’ll downsize” as when it comes to the crunch, many people are reluctant to do so. Stamp duty levels are a hindrance to this – why downsize if you can avoid writing a cheque to the HMRC?
Louisa Sedgwick, Vida Homeloans: Interest only is a credible solution for some customers, not all. Where it could be deemed appropriate is for later life borrowers, where downsizing is an option and interest only is a more affordable proposition. Young professionals who start on the housing ladder on interest only, however, switch to a repayment mortgage as they mature into their roles and their affordability allows them to do so.
Terry Jordan, RBSIP: At RBSIP we continue to support the interest only market and continue to allow interest only lending subject to certain criteria. There remains a market for the more financial sophisticated and astute borrowers who have a repayment vehicle in the background that will cover the balance outstanding.
Where do you think house prices will be in the next 12 to 24 months?
Ross Turrell, Fleet Mortgages: House prices are looking to remain fairly flat this year as affordability remains tight, before starting to increase at a modest rate in 2018.
Keith Barber, The Family Building Society: Pretty much flat nationally due to the uncertainty around Brexit. In London, we may see some small falls in areas that have increased particularly quickly over the last few years.
Louisa Sedgwick, Vida Homeloans: It’s likely that we will see steady house price growth (as we have seen over the last few months) outside of London and South East, where prices are likely to remain static or may see a slight reduction.
Terry Jordan, RBSIP: We might see the same geographical differentiation in house prices as we are currently experiencing. London and the South East may continue to experience stable prices whilst prices around larger conurbations outside London e.g. Manchester, Leeds and Birmingham could experience continuing rising prices.
Peter McGuinness, Bluestone Mortgages: Whilst there is a fundamental shortage of housing in the UK, there will continue to be pressure on house prices to increase, combined with the current low interest rate environment. However, we expect this effect to be moderated by a more cautious consumer who may defer a decision to move or upsize until the effect of Brexit is better understood.
What do you expect the buy to let lending arena to look like by the end of 2017?
Ross Turrell, Fleet Mortgages: The buy to let market is now adjusting to the new PRA underwriting standard for rent calculation and will likely find its level by the end of the year. However, the next major change will be the implementation of the final part of the recent PRA supervisory statement which brings in stricter underwriting for portfolio landlords. We are likely to see some polarisation of lenders, those that have the appetite to continue to do business with landlords having four or more mortgaged buy to lets – which will generally be the specialist lenders and the bigger players, and those lenders that will purely deal with the part-time landlords with small portfolios.
Keith Barber, The Family Building Society: We expect it to polarise between professional landlords with significant portfolios using limited company structures and continuing much as before otherwise. Part-time and accidental landlords may find that the tax changes mean that having buy to let property is a net drain on their incomes and may want to exit if they can’t pay down some of their debt.
Louisa Sedgwick, Vida Homeloans: The future for the buy to let market remains very bright. The pathway will invariably change over the next few months as we see the next regulatory change take effect at the end of September. The taxation changes have yet to take effect as they are being phased in and as such landlords have not yet felt the pain of the changes implemented in 2016, these will start to bear fruit later in 2017. We may start to see a change in the demographic profile of the landlord over the next 12 – 18 months, where the buy to let limited company landlord will start to overtake the ‘sole trader’, who may choose to dispose of any buy to let properties, in particular where this is a hobby and not their main source of income. Either way, 2017 will see a reduction in overall buy to let lending as landlords take stock and plan their property letting future.
Terry Jordan, RBSIP: Recent changes continue to impact upon the buy to let sector and we have noticed a reduction in buy to let lending. Landlords are likely to look to the refuge of a limited company status if they are professional landlords and we might also see some amateur landlords exit the sector as returns are eaten away due to the new regulations.
Will the first-time buyer market increase or decrease? And how will they fund their deposit?
Keith Barber, The Family Building Society: We expect the first-time buyer market to continue at current levels. Many people benefit from help from their parents or wider family and we expect that to increase as products such as the Family Mortgage become more well known in the market. We’d expect to see a refocussing of Help to Buy towards those who need the most help.
Louisa Sedgwick, Vida Homeloans: The future is bright for first-time buyers. There are a number of government schemes available, which to date have been the backbone of this lending sector. However, we have seen the re-emergence of 95% lending/shared ownership on new build and of course great initiatives like four people buying together from Vida. We need to continue to support this growing market and convince first-time buyers they can purchase their own homes.
Terry Jordan, RBSIP: All political parties seem directed to supporting the housing market issues and see first-time buyers as the customer segment to oil the rest of the housing market. The Help to Buy scheme or some new government initiative is likely to gallop over the horizon to rescue first-time buyers whilst Bank of Mum and Dad already being the 9th biggest lender in the UK will grow in popularity as lenders promote the options available in this space.
Peter McGuinness, Bluestone Mortgages: First-time buyers are an essential part of the market and they’ve actually been among the most active participants in the market in recent months. We expect to see increased activity from the Bank of Mum and Dad assisting with gifted equity style transactions, although lenders are taking care when assessing affordability for these borrowers who often have not had a history of prior borrowings.
So there you have it. Straight from the horse’s mouth, so to speak. We may be heading into uncertain times, however, the need for innovative mortgage products which cater to growing niches in the market has never been greater.
Property transactions may slow down over the next few years and some areas of the UK, like London and the South East, which were experiencing quick growth may decrease slightly as investment into the UK economy is put on hold.
The number of landlords operating in the buy to let market may reduce as part-time landlords feel the squeeze on their income. However, as purchases reduce, the number of landlords needing guidance when remortgaging under the new regulation will increase.
First-time buyers, older customers and customers with adverse are all growing markets which will greatly benefit from the advice and support a mortgage broker can provide.
We hope this feature provides you with some reassurance and helps to highlight that even during periods of austerity there is always opportunity.