Against all the odds, 2020 was a turbocharged year for the mortgage market. House prices soared as the government boosted the industry with tax breaks and other support.
Critics warned that this boom could not be sustained and a cliff edge awaited once the stamp duty holiday was withdrawn. However, thanks to the chancellor’s decision to extend and then taper the scheme, there are renewed hopes that activity can remain strong in 2021.
The mortgage market surge is shown in FCA figures. The value of new mortgage commitments reached £87.7bn in the last three months of 2020. This was 24.2 per cent higher than in Q4 2019 and represents the strongest quarter since 2007.
MCI Mortgage Club head Melanie Spencer says the early signs for the start of 2021 have been similarly encouraging.
“A record number of completions are coming through the club,” she says. “In February, completions were up 50 per cent on October 2020.”
But will those parts of the market that suffered last year make a comeback? The long-awaited return of mortgages at 95 per cent LTV will bring relief to first-time buyers, but what about the self-employed and others who have suffered financially because of Covid-19?
Trinity Financial product and communications director Aaron Strutt says the market has repeatedly shown it is capable of coping with financial turmoil.
“Since the last financial crash, there have been regular dangers to the property market and buyer confidence,” he says. “With the once-proposed mansion tax, house-price crashes, Brexit and now coronavirus, it seems there is always something to worry about. But, if borrowers chose to hold off buying because of economic threats, they would wait a very long time to get on the property ladder.”
Innovation
So what is on the horizon for the UK mortgage market? Some much-needed innovation could arrive in the form of ultra-long fixed-rate mortgages. Digital broker Habito has a new deal that allows borrowers to fix their loan for 40 years, while another new player, Perenna, is offering 30-year fixes.
Greater product choice is good news for consumers, but experts question whether borrowers will want to lock in to such long-term deals. Previous attempts to launch 25-year fixes received a lukewarm response and even 10-year deals generate little business compared to short-term fixes.
“Borrowers will be wary until they understand the flexibility of these new products,” says Spencer. She explains that, unlike previous long-term fixes, the new breed of loans are portable and have no early repayment charges after the first five years.
Just Mortgages and Spicerhaart national operations director John Phillips thinks the habit of using two- and five-year fixes will be difficult for many borrowers to break.
“Adding choice is good, but we don’t believe there will be a huge amount of interest in these long-term fixes,” he says.
But Spencer thinks the financial turmoil caused by Covid could influence borrowers.
“The pandemic has shown us that the future can be uncertain and long-term fixes could give customers more financial security,” she says. “Borrowers know what they will be paying each month for the whole of their mortgage, and won’t get stuck on a standard variable rate if they are unable to remortgage due to a poorer future financial position.”
Perhaps more important will be the return of 5 per cent mortgages. These loans effectively disappeared with the first lockdown and have been slow to come back. Money-facts data shows that at the start of March 2021 there were just five loans available at 95 per cent LTV. A year ago there were 391 such deals.
Initially, banks withdrew the products amid concerns that a coronavirus recession could cause house prices to plummet. Thanks to the stamp duty break the opposite has happened, yet few banks have dipped their toes back into this market.
Strutt believes it may take only one or two bigger lenders to take the plunge before the market follows suit.
“Many lenders have wanted to come back to the 5 per cent deposit market, but they were not prepared to do it on their own through fear of being swamped with business,” he says.
But Strutt adds that competition in the 90 per cent LTV market has increased substantially, suggesting that a return to 5 per cent loans may not be far behind. Moneyfacts data shows the number of 90 per cent LTV deals has risen from 160 in January to 323 in March.
Yorkshire Building Society became the first lender to relaunch its 5 per cent loans in March. The government has also announced a new Mortgage Guarantee Scheme to support the return of loans at 95 per cent LTV. Lenders are currently working with HM Treasury to flesh out the details.
“Banks and building societies have huge lending targets and are constantly looking at ways to innovate,” Strutt says.
This has also led to other policy improvements, he adds.
“If you look at Metro Bank’s policy change for people with credit blips, or Kensington’s return to six-times-salary lending to professionals, it shows things are happening,” Strutt says.
Supercharged stamp duty
Another government-backed boost came in the form of the extension to the stamp duty holiday. To try and prevent a collapse in transactions once the extended holiday ends on 30 June, buyers will pay a much-reduced stamp duty charge on purchases that complete before 30 September.
The nil-rate band has been increased to £250,000 from £125,000, meaning the average house purchase will incur no tax at all. This will greatly benefit buyers outside London and the Southeast, where house prices typically are lower. Phillips says it could spark a new wave of transactions.
“Once the lockdown ends and the economy begins to recover, those who have been waiting for more clarity may look to move. This could lead to more properties on the market, resulting in supply catching up with demand,” he says.
He believes the primary motivation for movers will continue to be swapping small, city-centre properties for those with outdoor space.
“Quality of life and finding the right home are key,” he says.
What makes the financial turmoil unlike previous recessions is the fact the nation has been divided into haves and have-nots. Some homeowners have spent a year on furlough or with dramatically reduced incomes, which will affect their housing ambitions in the long term. Others have spent the year working from home, dramatically cutting spending on commuting, holidays and more while retaining the same income. It is the former group who should be of most concern to mortgage lenders, says Spencer.
The self-employed and others with insecure work contracts have been squeezed out by lenders that require significantly more paperwork and proof of earnings than before. Spencer thinks lenders could remain wary for some time.
Help to Buy
The hugely popular Help to Buy scheme has also been extended, but with new regional price caps. Some believe this will change the profile of users. HTB will be limited to first-time buyers purchasing homes with below-average house prices. Being blocked from the scheme could make young buyers even more reliant on parental support, which Strutt says would open up new opportunities for lenders.
“The Bank of Mum and Dad is still busy, so I suspect more lenders will come into the joint-borrower/sole-proprietor market,” he says.
Strutt believes there also needs to be greater focus on ‘credit building’ mortgages, targeted at those who have struggled financially and are looking to improve their finances.
“Borrowers will need credit repair products, or for lenders to be more flexible if they have missed repayments,” he says.
Spencer adds: “It is niche areas like this where building societies and specialists could increase market share and use their manual underwriting and common-sense approach.”
And what about brokers? A new way of working has become the norm and Phillips believes this will provide lasting benefits to the industry.
“After a difficult transition, lenders, brokers and clients have adapted well to virtual interactions,” he says. “Efficiencies can still be used once we return to normal life.”
