market uncertainty – and what it means for lending
After years of rock-bottom interest rates, it finally looks as though they are heading for 5 per cent, with some commentators even suggesting 6 per cent. We don’t expect the situation to get as bad as that but we wouldn’t be surprised if rates stabilise at around 4 per cent over the next two years. It is hard to predict as recent history has shown us that unknown and unexpected external events can have quite the impact. If something dramatic such as another pandemic came along or the war with Ukraine took an unexpected turn for the worse, for example, they could end up higher but otherwise 4 per cent sounds about right.
What we do know for certain is that the lows of 1 or 1.25 per cent aren’t sustainable and can’t be justified. The problem is that borrowers have got used to interest rates at this level, which is not their fault as many of them, particularly first-time buyers, have simply never known them to be higher.
Now that interest rates are rising, the housing market will undoubtedly take a hit. Those borrowers coming to the end of two and five-year fixes could find themselves in trouble; they may have bought a £2m property when rates were low but are now finding their mortgage payments are set to double. To be able to afford such a hike in monthly payments is a big ask of anyone. Some argue that rates are nowhere near as bad as they were in the 1980s when they hit 14 per cent but Neal Hudson of BuiltPlace argues that this is equivalent to repayments of just 3 per cent now, thanks to higher income multiples, the removal of MIRAS (mortgage interest relief at source) and most mortgages being on a repayment basis. The important point is that the increase from record low rates can’t fail to have a significant impact.
stamp duty reform
Interesting times are ahead and the next few years will be hard; potentially, many will have to downsize as they simply can’t afford the property they are living in. The government could assist with a revision of stamp duty so that those downsizing don’t have to pay it – something MT Finance has been suggesting for a long time. Removing or reducing stamp duty for downsizers and enabling them to make the move to a smaller property with a lower value that they can better afford, will not only assist them manage their spending but keep the market functioning.
Banks will look to be lenient and show forbearance, and there is nothing to suggest that they wouldn’t be. Nobody wants to drive people out of their homes. This is a time for sensible non-bank lenders to come into their own with a common-sense approach to lending. They can support the market with flexible products; now, more than ever, borrowers need flexibility to allow time and space to be able to breathe.
Banks want to lend and need to get money out of the door, as that’s what they do. They want to support buyers and the government is encouraging them to do so. There will be a shift in products, changes in rental coverage and earnings ratios as products becoming more tailored and structured, rather than a tick box for everyone to adhere to.
a brighter future?
We should view the coming couple of years as a hump that we need to get over. A recession is expected; one was expected several years ago but with Brexit and then Covid, it has been pushed down the line. Recession is now on the cards, with the Bank of England saying that the economy is heading for a second consecutive quarter of falling output as households rein in their spending, and we have to deal with it. It will be hard but people will adapt, change their habits and get on with it.
House prices will be impacted but by how much nobody knows. Prime property is still in huge demand, particularly from dollar buyers as sterling is weak. The value of average homes will take a slight hit, with those who need to sell having to do so at a reduced price so that the incoming buyer can afford it. But even this needs to be put into perspective –while average annual house price growth slowed slightly in September, according to Halifax, it was still 9.9 per cent. So even if property prices fell by 10 per cent, they’d be back to roughly where they were a year ago.
get in touch
MT Finance is here to help. All our bridging loans are available for up to a two-year term, and interest can be retained for the full period, meaning no monthly payments for 24 months. This will provide landlords and investors with the flexibility they need to see through the current uncertainties before exiting onto a longer-term product once the market has settled down. Our lack of early repayment fees or ERCs ensures there are financial penalties for exiting early. To get in touch with one of the team, contact us online, on 0203 051 2331 or via firstname.lastname@example.org.