Runaway Train

As progress was made more fuel was thrown into the fire to make sure that this did not stall, or worse, slip back, and we truly now have a full head of steam. However, the train is now over the brow of the hill and starting to race down the other side alarmingly fast. Suddenly, having fed the engine so much, slowing down in a safe manner appears to be a lot harder than everyone thought. The prospect of another (train) crash has started to loom its ugly head once more. Forgive my clumsy train metaphor, but I think it illustrates the immense effort taken in trying to get the mortgage and housing markets up and running whilst not allowing the recovery to run away and form a bubble. My friends at BRIK will be able to talk about their experiences with house process in Fulham and Notting Hill; and this is certainly echoed across London looking at my clients. Across the UK prices are going up, but not by as much as in the capital.

So how do the regulators ease the growth without derailing it? Well traditionally the Bank would increase the base rate to slow down lending; however, as seen by the flapping that followed Mark Carney’s announcement of linking the base rate to unemployment, increasing the base rate is not something that anybody wants to do. The Office of National Statistics estimates that there are over a million households in the UK that are just about managing to pay their mortgage because they are on a base rate tracker at 1% or lower. Increasing the rate will trigger a potential mass repossession. So what else can be done?

Well, firstly, Funding for Lending was withdrawn in January, so taking away a flow of cheaper funds. Next I would expect the Bank of England to impose greater capital requirements on lenders. This means that banks would be asked to retain a larger percentage of liquid capital on their books, in relation to their overall lending. This usually has the impact of mortgage rates charged by lenders being increased, and overall lending reducing as banks try to fund the extra capital needed to be retained, without affecting their profits.

“the train is now over the brow of the hill and starting to race down the other side alarmingly fast”

A further measure (although probably unintended) is the potential affect of the Mortgage Market Review (MMR). This is a post mortem into the mortgage and housing crash of 2008, in an attempt to stop it happening again. A number of recommendations have been made, and these are due to be implemented in April this year. A key element here is a greater scrutiny of a client’s ability to afford the mortgage – so not just saying you can have five times your income, but actually looking at a borrower’s bank statements and accounting for all of their outgoings and spending. Therefore, if you are applying for a mortgage in May 2014 expect to be asked many more questions around your incomes and expenditure. I would expect this new process to prolong the time to it requires to go from application to mortgage offer (both in terms of the work completed by a mortgage broker and a lender), leaving providers the choice of employing more staff to do the extra checks; or producing fewer offers, eg, taking on less business.

The upshot of all of the above will be a gentle increase in rates, and potentially a slow down in the growth of lending. I still think that more money will be lent this year than in 2013, but not at such a fast rate. Hopefully this in turn will lead to Messers Carney and Osborne releasing some of the pressure on the mortgage express, and a more manageable market as opposed to a run away train crashing into the next station (which, according to the guard, is No More Boom and Bust – a once thriving town, but now a run down and sad suburb, packed full of bookies, pawn brokers and charity shops).

The impact for my clients is that rates are going up. We have already seen Santander, NatWest and Clydesdale pull their market leading five year fixed rates, and I believe that this will continue. If you are on a lifetime tracker or discount paying 2.5% or more, at a loan to value of 80% it is time to move. Rates are only going to go up, so if you want to lock in for medium to long term security you need to hurry, as the last train is leaving, and you do not want to be stuck on the rail replacement bus service.

Words:
Alistair Hargreaves
Mortgage Consultant, John Charcol