Dallas, Texas (PRWEB) May 12, 2014
Mortgage lending activity continued to grow during the recessionary review period, with gross lending rising at a compound annual growth rate (CAGR) of 5.24% during the review period (2009–2013), to a five-year high of GBP176.4 billion in 2013. The balance outstanding on a book of 13.96 million UK mortgage accounts stood at GBP1.28 trillion at the end of 2013.
Despite the contraction in economic growth, slow earnings growth, and a rise in unemployment and redundancies during the review period, demand for mortgages was supported by first-time buyers and buy-to-let investors. First-time buyers benefited from ongoing policy stimuli in the form of Help to buy equity loans and a portion of high loan-to-value mortgages underwritten by the government. Buy-to-let lending was fuelled by easy access to interest-only loans and high yields in the rental market.
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The government's Budget for financial year 2014/15 favoured housing-based construction measures – the extension of Help to Buy, finance for self-builders, GBP500 million for small house building firms, and a garden city in Ebbsfleet – in addition to increased Right to Buy discounts for social housing tenants announced in January.
The two-part Help to Buy scheme will be the premier driver of demand for mortgage lending: mortgage guarantees underwritten by the government will be in place until 2016, while 20% equity loans are now scheduled to last until 2020. Both have re-opened access to mortgages to borrowers with small deposits. Mortgages of more than 95% loan-to-value accounted for 5.7% of new approvals in 2007, and loans at 90-95% loan-to-value 8.5%. These proportions had fallen to 0.5% and 1.8%, respectively in 2013.
Mortgage affordability eased during the recession as the Bank of England reduced its policy interest rate to a record-low of 0.5% in 2009, and Funding for Lending provided 18 months of access to cheap bank finance. This prompted retail lenders to lower interest rates on tracker and fixed-rate mortgages during the review period, leading to lower-value loan repayments from 2009 onwards. At the same time, however, the availability of mortgages was stifled by a heightened wariness towards risk. Mortgages of over 95% loan-to-value accounted for just 0.5% of new approvals in 2013, compared to 5.7% in 2007.
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Help to buy is expected to be the primary driver of mortgage demand over the forecast period, but remains dependent on the government’s allocated funding lasting until the scheduled 2020 end date. The scheme has re-opened the market for buyers with small deposits and reinvigorated demand from home movers. Favorable government policy towards self-build projects, higher social housing tenant discounts for Right to Buy, and the inclusion of Sharia-compliant products in Help to Buy will aid the development of niche mortgage lending categories. Gross mortgage lending is forecast to rise at a CAGR of 6.11% over the forecast period (2014–2018), increasing balances outstanding to GBP1.35 billion in 2018.
While the immediate ability to repay mortgages is assisted by low interest rates, a tightening of monetary policy is inevitable as economic growth gains pace. Existing borrowers on fixed-rate deals will be protected against initial interest rate rises expected in late-2015, but concern over the affordability of repayments under a higher interest-rate scenario led the Financial Conduct Authority (FCA) to introduce remedial measures in the conclusion of its Mortgage Market Review in April 2014. Mortgage applicants will be subject to greater financial scrutiny, and stress tested against a rise in borrowing costs, potentially increasing delays and rejections, and impairing sentiment towards the home-buying process.
Growth in interest-only mortgage lending will be driven by the unregulated buy-to-let side of the market, as a ban on the self-certification of income and the requirement for a credible capital repayment plan is likely to deter homebuyers. The mortgage market will also have to contend with the withdrawal of Funding for Lending and a growing preference for renting, as well as the prospect of an International Monetary Fund (IMF)-approved cap on mortgage loan-to-value ratios, a move which has not been ruled out by Bank of England policymakers in the event of a nationwide housing market bubble.
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