Aamina Zafar reports on a market still recovering from the disastrous mini-Budget and rising interest rates
The start of this year has heralded a new dawn for the mortgage market, which is slowly recovering from a torrid final few months of 2022.
This positive projection comes from Karen Noye, financial adviser at Quilter, who anticipates an upturn in fortunes. “The start of 2023 is starting to look a little less bleak than the back half of 2022,” Noye says. “While the increasing rates will still be causing huge pain for millions, there does seem to be more light on the horizon, with rates set to drop by the end of the year.”
However, she predicts high interest rates will only gradually improve as we move towards spring.
“It is still difficult out there and it is unlikely to get much better before spring,” she says. “While it is difficult to predict the future, it is clear that higher rates are here for the foreseeable future and therefore, for some clients who perhaps are happy to take more risk, now might be the time to take a two-year tracker with no penalties, giving clients flexibility to refinance. This gives people that are a little braver the chance to take a rate that might rise in the short term but avoids locking in to an unnecessarily high rate now.”
Interestingly, Saira Haider, director at Mansion Mortgages, says that although business has slowed since September 2022, things are beginning to look up as borrowers become accustomed to higher rates.
She says: “Things have slowed down since September but we are seeing clients becoming more accepting of the higher rates, obviously not at the rate it was before but back to slow and steady. We are able to service existing clients better, which means product transfers and remortgages are up.
We have 30% purchase clients currently, compared with more than 60% before. We foresee spring markets will stay the same, but we are hoping that markets move in a positive direction as that is seasonally peak time for people to move.”
It is not only homeowners that will continue to feel the pinch in the short term.
Adviser Jiten Varsani says higher interest rates may also see demand for buy-to-lets (BTLs) fall and force existing landlords to sell some of their property portfolio as their returns plummet or even turn negative.
The mortgage and protection adviser at London Money Financial Services says: “I think that as a result of high interest rates, we will see the demand for new purchases of property, particularly BTLs, fall. In turn, we’ll also see existing landlords look to sell up as they see that returns are highly diminished and in some cases are negative. This in turn should see a fall in asking prices. This can be a real benefit for first-time buyers (FTBs).”
Overall, mortgage lending is expected to fall by 15% in 2023, in a return to pre-pandemic levels, according to UK Finance forecasts.
Despite the higher rates predicted until at least spring, many borrowers may need to remortgage. Sadly, the high cost-of-living means many customers will be in arrears, as they struggle with high heating and electric bills during the winter, soaring food prices and potentially eye-watering monthly mortgage bills.
But Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, believes even this will not be as bad as some pundits have predicted. Even the Bank of England figures from Q3 2022 show that the value of outstanding balances with arrears fell 1.4% during the quarter and accounted for 0.78% of outstanding balances – the lowest since recording started in 2007.
She says: “The ONS separately tracks the proportion of people who say they are behind on rent or mortgage payments and only 2% are. This has fluctuated between 2% and 5% since they started measuring it in March, so it doesn’t indicate a flurry of new arrears.
“If you are in arrears it can be incredibly difficult to remortgage, but it’s not always impossible.”
This is why Varsani argues that the role of the adviser will be fundamental in the coming months to ensure borrowers can survive turbulent times.
He says: “The role of an adviser will be key at this time. We need to guide clients where we can. That means help with budgeting and prioritising spending in the right way. Sometimes, an external person is best placed to highlight some home truths about monthly spending cuts. Our advice should also be focused on how to reduce mortgage payments where possible. For example, overpayment using savings and/or extending mortgage terms. This is of course subject to this being suitable advice for the client.”
This is echoed by Liz Syms, vice-chair at the Society of Mortgages Professionals and chief executive officer of Connect for Intermediaries.
The key thing is to ensure that customers understand that getting advice will potentially give them more options to improve or stabilise their position
She says: “Advisers can assist when reaching out to existing customers by educating them on the increased importance of maintaining their credit to secure the best mortgage rates when their deal comes to an end. Where arrears are unavoidable, the adviser may still be able to assist clients by understanding the range of lenders that can consider credit blips. A rate transfer will often still be an option. The key thing is to ensure that customers understand that getting advice will potentially give them more options to improve or stabilise their position.”
The high interest rates are not the only things shaking up the mortgage market. In September 2022, the threshold at which stamp duty land tax (SDLT) became payable rose from £125,000 to £250,000, the nil-rate threshold for FTBs relief rose from £300,000 to £425,000, while the maximum value of a house that could benefit from FTBs relief rose from £500,000 to £625,000. In November, Chancellor of the Exchequer Jeremy Hunt announced that these changes would be temporary and revert back to the old thresholds in March 2025.
Commenting on how these changes will impact borrowers, Syms says: “Unlike during the lockdown, I don’t see these SDLT changes having a massive impact. The saving may help a few more FTBs onto the ladder a bit quicker as there is less money to find for the purchase, but it does not affect the affordability, which has become a bigger issue with the higher rates.”
A similar notion is echoed by Coles, who says: “There will be less tax to pay on transactions in the interim, although the window is long enough not to have spurred a flood of sales in the same way as the short-term SDLT holiday during the pandemic. We are likely to see people bring purchases forward as we get closer to the deadline.”
There is no doubt that the biggest shakeup in the mortgage market came in the wake of the controversial mini-Budget by former Chancellor Kwasi Kwarteng, which spiked interest rates and saw multiple lenders pull mortgage products. Even now, mortgage deals remain significantly more expensive than before the chaos kicked off.
Varsani says this shook consumer confidence and it is still struggling to recover. He says: “Consumer confidence is shaken. The public has got very used to the low rates over the last decade. They do not understand why rates have suddenly increased so sharply. They will feel the impact of these increases on mortgage repayments, along with any other borrowings they may have.
“Some good news is that the pace at which lenders are changing products has eased. In turn, this has calmed the market somewhat and eased the time-sensitive burden advisers found themselves in. Additionally, we are seeing lenders bring back some previously withdrawn product ranges.”
Aamina Zafar is a freelance journalist