How low can we go?

Neil Hoare Commercial Director

Q3 in the mortgage market has been one of quiet reflection after the rush to complete property purchases before the 30th June.

That doesn’t mean that lending has in any way fallen off a cliff, there has been change of tack to remortgage and product transfer.

However, lender’s appetite to drive mortgage volume hasn’t been diminished, record low headline rates for those low risk customers in low risk housing are on offer. The word for the day “low” and the feeling is that the word might become “lower” or even “lowest.”

The reason for the drive to increase mortgage lending – Lender’s capital positions, there has never been so much money floating around in bank accounts and ring-fencing, the rule that states retail cash can only be used for retail activities, means the cash cannot be invested in stocks & shares. When the pandemic hit, the UK Population’s reaction was to financially de-risk themselves. Many mortgage holders took payment holidays on their debts and used the spare cash to pay down expensive credit card balances and loans to the tune of £20bn, and when it came to businesses, according to the Bank of England, businesses’ cash balances increased by around £132 billion (around 25%) since end-2019 much of this coming from external financing. 48% of SMEs now hold at least one month’s worth of turnover as cash reserves in February 2021, compared to 39% in the previous year.

Of course, many commuters aren’t commuting, many holidaymakers aren’t holidaying, and many shoppers just aren’t shopping. This money just sits in their bank accounts. As of May 2021, over 80% of households that had taken out mortgage payment deferrals had returned to full repayments after their deferrals ended.

According to the Bank of England’s stability report, nearly 450,000 residential property transactions took place in 2021 Q1, or one and a half times the average quarterly level over the past decade, and the highest since before the global financial crisis. The combination of the stamp duty holiday, structural factors such as households prioritising additional space to accommodate flexible working arrangements, increased savings accumulated during the pandemic, as well as the continued low interest rate environment have all contributed to the strong levels of business. The assumption is that all these factors will drive a strong housing market past the 30th September deadline for the final phase of the Stamp Duty holiday in England.

One of the Key drivers of House Price is the cost of borrowing and, as interest rates remain low, then the cost of buying a home will continue to rise. As house prices increase, then LTV levels in Lender back books of mortgages reduce, releasing further capital into the market meaning an increased urgency to convert capital into lending. And that’s not including the capital that lenders can acquire from the Bank of England under the Term Funding Scheme (TFS). Early on, it was identified that when interest rates are low, it is likely to be difficult for some banks and building societies to reduce deposit rates much further, which in turn could limit their ability to cut their lending rates. The TFS offers four-year funding at interest rates at, or very close to, Bank Rate, hence giving lenders access to very cheap funding.

So what’s the conclusion? Expect low mortgage rates to continue for some time to come as excess capital washes itself through the system. Lenders need to lend, so see strong competition for low LTV customers. There will be a drive to reduce costs, so see more assertive actions to retain customers via product transfers and more investment in technology to remove human intervention in the mortgage process. House prices could remain high, as low stock levels drive demand for desirable property and of course the requirement to have a garden will impact on the need for flats, although with the re-purposing of town centres away from shopping towards hospitality, then we may see buyer appetite for flats return, especially for those first time buyers.

The word for the day “low” and the feeling is that the word might become “lower” or even “lowest.”