Market review

Looking at the numbers

Craig Calder

director of mortgages, Barclays

The challenges facing borrowers continue to mount in the face of heightened energy prices, swap rates trending upwards, rising interest rates, and soaring levels of inflation, all of which are hampering consumer confidence and spending to an extent. However, the intermediary market remains busy and adviser workloads are still high as we move toward the back end of 2022.

MORTGAGE APPROVALS

This was evident in the latest Money and Credit statistics from the Bank of England, which outlined that mortgage approvals increased to 63,800 in July, up from 63,200 in June. Net mortgage borrowing decreased slightly to £5.1bn in July, from £5.3bn in June. However, this is above the pre-pandemic average of £4.3bn in the 12 months up to February 2020.

Gross lending increased to £26.1bn in July from £24.6bn in June, and gross repayments rose to £20.8bn, from £19.4bn. The effective interest rate paid on newly drawn mortgages also accelerated by 18 basis points to 2.33 per cent in July and is the highest since June 2016 (2.39 per cent).

This set of data emphases the resilience of the mortgage market and how it defies some expectations. Having said that, with many personal financial situations being squeezed, as an industry we have to expect a degree of pushback from potential purchasers. On the flip side, greater levels of activity should be expected from homeowners who are looking to act quickly and lock into the best deals prior to any further rate hikes. As cost-of-living anxieties continue to rise, it was a huge positive to see mortgage arrears continue to fall in Q2

REMORTGAGE

Harking back to the BoE figures, these also showed that approvals for remortgaging with a different lender increased to 48,400 in July from 43,300 in June. This does remain below the 12-month pre-pandemic average up to February 2020 of 49,500.

In addition, the latest LMS data showed that remortgage completions increased by 41 per cent in July as homeowners prepare for future rate rises, and suggested that 88 per cent of remortgagors now expect further interest rate increases within the next year. It was also interesting to see that 70 per cent of those who remortgaged in July took out a five-year fixed-rate product – by far the most popular product over the month.

As outlined in commentary around this data, as people grapple with economic uncertainty, the popularity of five-year fixes has hugely increased in comparison to last year. In July 2021, fewer than half of homeowners remortgaged to a five-year fixed rate, a figure that has increased to 70 per cent this year.

Amidst this uncertainty, the advice process is playing a vital role in helping a range of homebuyers to secure their monthly mortgage outgoings for longer periods, if appropriate for them. And with personal financial scenarios shifting all the time, the value of this advice will only grow.

ARREARS

As cost-of-living anxieties continue to rise, it was a huge positive to see mortgage arrears continue to fall in Q2. According to the latest figures from UK Finance, there were 74,540 homeowner mortgages in arrears at the end of June. This is defined at 2.5 per cent or more of the outstanding balance. The trade body said that this was a reduction of around 200 homeowner mortgages compared to the previous quarter, and 10 per cent fewer than the same period last year.

UK Finance also noted that, in absolute terms, there were 530 more possessions in Q2 2022 compared with the same period last year. However, it was pointed out that year-on-year comparisons for possessions will look unusually large due to greatly suppressed activity in Q2 2021 as the courts and the industry slowly resumed activity following the end of the possession moratorium. Possessions taking place now are, therefore, almost exclusively historic cases that would, under normal circumstances, have taken place over the course of 2020 and 2021.

Arrears figures may be substantially lower than pre-pandemic numbers, but this is certainly an area that needs to be closely monitored, as some households will struggle to keep up with additional living costs, and communication remains key between lenders and borrowers to ensure these levels of arrears remain as low as possible. M I

This is a storm that will require lenders to invest

Tim Hague

MD, Sagis

It took the sub-prime crash, ensuing credit crunch, and the global financial crisis for regulators and central banks the world over to take a proper look at how lenders assessed borrowers’ ability to repay their mortgages. The Mortgage Market Review (MMR) that followed was seen by many as closing the barn door long after the horse had bolted.

Although not technically the result of the MMR, further regulations imposed by the Bank of England included more robust capital buffers and rigid stress-testing on affordability. In August, that stress test – long argued against in the context of rock-bottom rates – was dropped.

After six base-rate rises in less than a year, and with more on the way, the need for borrowers to have the financial capacity to withstand a three per cent rise in their mortgage rate now looks rather less draconian than it once did. Caution is more ingrained in lending culture in today’s market, and just weeks after regaining the freedom to use judgement in the underwriting process, lenders are exercising it fully. The strain that inflation and the cost of energy are putting on households and businesses across the country is painfully clear. Within 48 hours of Ofgem confirming October’s price cap would almost double and the average household’s energy bills would come in at more than £3,500 a year, Jolyon Maugham, director of the Good Law Project, announced plans to sue for failure to account for the devastation it will cause.

Lenders are acutely conscious of the responsibility this cost-of-living squeeze will lay at their doors. On one hand, borrowers already on their books are going to struggle to maintain mortgage repayments long-term if this cost pressure does not abate reasonably swiftly. Mortgage payment holidays, affordable payment plans, and managed arrears are very definitely coming. On the other, borrowers coming to the end of fixed-term deals will be demonstrably better off if allowed to remortgage onto another fixed-term deal rather than defaulting to standard variable rates or switching to a deal that is higher than the deal they are rolling off.

This raises the question of responsible lending. How do we define responsible in a market such as this? Is it responsible to allow borrowers to take on mortgages that they cannot afford to repay? Is it irresponsible to refuse to remortgage borrowers who cannot afford to repay in the current economy?

DRAWING THE RIGHT LINE

The cost-of-living crisis is causing a whole raft of issues with affordability – lenders’ duty of care is to their customers, but also to shareholders, members, and staff. When sensibility is allowed to trump commercial reasoning, it may keep roofs over people’s heads – but what happens when it topples the lender?

In many ways, this will come down to the big retail banks, which have the capital resilience to absorb much of the cost-of-living shock its customers are about to feel. Under the regulator’s eye, I have no doubt they will do their bit.

This won’t solve problems for everyone, however, and it is a risk that smaller lenders would do well to give some serious attention as soon as possible. An increasing number of lenders are quietly giving their affordability models a haircut. The regulator is also concerned, as the Office for National Statistics’ (ONS) date that most lenders use is backward-facing and currently bears no relation to what expenses will look like in the coming months.

Increasing buffers is now a matter of some urgency, and many are achieving that by factoring in higher costs and lower disposable incomes when assessing affordability. It is a prudent thing to do, but it is anyone’s guess what level is the right one to apply.

Brokers report seeing cases declined when a week or two earlier they would have been accepted.

Implications for borrowers aside, the speed with which affordability is changing poses a big problem for lenders. Already Moneyfacts has noted how much more frequently lenders are withdrawing products from the market, only to replace them with higher rates and lower loan-to-value deals. Big lenders with slick processes can cope with that speed, reacting fast enough to protect against a sudden flood of applications triggered by the withdrawal of a competitor’s range.

Smaller outfits, and many of the smaller building societies, will find it increasingly challenging to manage. Typically, smaller lenders have more involvement in higher LTV lending, and can least afford to take a hit on the balance sheet. Yet, counterintuitively, battening down the hatches when the storm clouds are gathering may not be their wisest move. This is a storm that will last, and it requires lenders to invest in thinking, people, processes, and systems if they want to weather it. This storm will need lenders to invest, which will require guile and bravery. M I

We must all take a sensible and holistic view of borrowers’ circumstances

Stuart Miller

chief customer officer, Newcastle Building Society

By the time you read this, the summer holidays will seem a distant memory.

Forgive me, then, for harking back to an announcement that we made at the very end of July when we published our full-year results. Over the previous 12 months, we had lent £448m in mortgages, with £181m of that in the first half of the year.

It’s been an unpredictable year in so many respects, with the result that inflation forecasts just keep rising. While it was originally expected to peak at 10 per cent, the Bank of England (BoE) then said 13 per cent was more realistic. Analysts from Citi said in August that their models indicate inflation will be more than 18 per cent by Easter next year.

People are worried, understandably. Strike action over pay and jobs has been rife amid rising concerns over where the money will come from to pay energy bills already expected to surpass £6,000 a year by April 2023. From dockworkers to train drivers, station staff to criminal barristers and teachers, too – the cost of living is biting across the economy and in all walks of life.

It’s at times like these that banks and building societies are needed most. Communities, households, families, the old and the vulnerable all face a very difficult winter, and it is ultimately going to be financial services – us – who have a responsibility to help them get through it.

Most homeowners, I am relieved to say, are in reasonably good shape financially. A year of lockdowns allowed those who could keep working to save money, and it’s a cushion that will be extremely welcome if bills continue rising as quickly as they have. At the end of June, arrears on our book remained very low, and this is reflective of much of the industry. Even so, with the BoE tightening monetary policy and all indications currently suggesting this will continue, mortgage rates are on the rise.

We are conscious that, as we head into the autumn and winter, many homeowners will be due to remortgage, and the likelihood is their rate will be noticeably higher than deals taken in 2020, when the pandemic brought the base rate down to 0.1 per cent.

The Bank of England’s decision earlier this year to remove strict affordability assessments based on disposable income in favour of common-sense affordability reviews is now becoming embedded in the market.

This should be helpful for borrowers whose discretionary spending has been relatively high and can therefore absorb a drop to pay for higher energy and food bills. Nevertheless, they will need good-quality advice to navigate what could be a tricky financial balancing act.

We specialise in taking a sensible and holistic view of borrowers’ financial circumstances – we always have. Now, when times are uncertain, lenders’ judgement is going to be even more important.

More than the changing costs of heating and groceries will influence customer behaviour in the future. Choice comes into it – at least for those who have sufficient income to cover rising bills. Mortgage payments are the last thing to go when people face tough times – holidays, expensive TV packages, and meals out are easier to give up than the roof over your head.

Even if there is a rise in the number of homeowners really struggling to keep up with significantly higher outgoings, we – and, I would hope, others – are about helping borrowers, not compounding their problems. As a building society, we also believe lenders like us have a responsibility to step up when things are hard for our customers.

Newcastle Building Society was one of the first savings providers to respond to the BoE’s decision to increase the base rate, passing on the rise to the majority of variable-rate savings products. We continue to focus on supporting first-time buyers and low-deposit borrowers because they need our help.

I am incredibly proud that in the first half of this year, we have given £182,000 in community funding. That includes community grants from the Newcastle Building Society Community Fund to the Community Foundation, which focuses on charities tackling employability, social isolation, food poverty, homelessness, debt management, and cancer care.

Our strength of purpose is more relevant than ever to our customers and communities. We think it shows – this is the sixth year in a row we have been awarded Best Regional Building Society at the What Mortgage Awards. Serving our customers is at the very core of what we stand for at Newcastle Building Society, so it’s rewarding to know they think we’re doing a good job. M I

Agility has never been more important – to everyone

Steve Carruthers

head of business development, IRESS

Moneyfacts data showed the average shelf-life of a mortgage product had sunk to a record low of just 17 days at the start of August. Another base-rate rise later, and providers again pulled products and came back with revised pickings.

The market has seen lenders withdraw and reprice far more frequently than had been the case in a good while. Partly that’s down to the changing economic situation; it’s also due to lenders needing to control application volumes as competitors pull products, suddenly rendering their deals best-buys.

Rates continue to climb. Since the start of August, Moneyfacts data shows the overall average two-year fixed rate has already increased by 0.14 per cent and has now reached 4.09 per cent. According to its first-ofmonth averages, this is the first time that this rate has breached four per cent since February 2013.

Even in our Mortgage Efficiency Survey interviews this year, getting products in and out of market has become a serious issue for many of the lenders to whom we spoke – many have not had to go through the gears of quick product repricing for many years, with serious consequences for operational and funding models.

Meanwhile, the price gap between variable and fixed deals is becoming increasingly marked. This is one of the flags that makes me wonder about how the majority of the mortgage market defines value. Sourcing systems throw up results based on rate. We all know that fees matter. We all know that most clients don’t actually care.

Very often I think the need for agility is viewed from the lender’s point of view, but brokers and borrowers will demand it, too. Borrowers are even more price-sensitive than usual given the rising cost of living. Every extra pound in their pockets each month is really going to matter for an awful lot of people. But their financial circumstances are also going to be a lot more complex, unpredictable, and stressful.

This means there is a very good possibility that agility in pricing and mortgage propositions will be with us for some considerable time – not simply because of funding issues that support product pricing, but because consumers will make decisions today on borrowing that they will want to unwind sooner than we, and they, may think.

You can see why. If a borrower is considering a move in the next couple of years, who’s to say an ERC-free tracker isn’t actually a cheaper option for them than a fixed they could have to pay thousands of pounds to get out of early? Some will argue for, others against.

Some lenders are worried that mortgage recommendations, skewed by headline rates dominating the brokers’ sourcing systems, could cause them a real headache in future.

The danger with fixing on the lowest rate possible is that, where loan-to-values are high, affordability is stretched. Even where affordability has a very healthy cushion, inflation is going to put the squeeze on.

Of course, this is where good advice is crucial. It’s not just lenders who are thinking this carefully about future affordability. There is also the regulator to consider – what is responsible lending in an economy where even stable and well-managed family finances look unavoidably wobbly?

Borrowers – and it’s often first-time buyers who are desperate to get on the ladder, whatever the cost – are all too often not going to worry about what happens next year. They’ve got the house. For many borrowers, house prices simply go up – don’t they?

I am not for one second saying they won’t – there are too many factors supporting demand and constraining supply for the housing market to tank. But that doesn’t mean that some borrowers will feel obliged to take a lower rate regardless of the upfront cost. It cannot be in customers’ best longer-term interests to mortgage themselves to the hilt when all of us are facing a very uncertain period for our finances.

The question of where mortgage products go next after the current bout of inflation will demand changes of us all. But in terms of implementation, speed and agility will matter to everyone because lending will be about delivering the right product at the right price at the right time. As we have seen, good outcomes are becoming the regulator’s goal for borrowers. The need for good products that serve everyone well will demand operational excellence from systems and people.

The future will require more products and newer propositions – digital and otherwise – that can meet the need for agile borrowing that surfaces as a result of the current market. M I

Agile thinking can make a good idea better

Steve Goodall

MD, e.surv

In markets as evolved as UK housing, coping with increasingly rapid change can require more ingenuity than might be expected in younger, lessregulated sectors. Challenges from the market, economy, or regulator come thick and fast. But rather than belabour a point about the inadequacies of legacy thinking and technology, I believe that, more than ever, it is important we remain agile to evolve and develop our propositions.

Brand-new apps and chat bots that manage to communicate with teenagers more effectively than their parents do are omnipresent. And there is a tendency in a mature market for its incumbents to feel a mixture of intimidation, confusion, bemusement, and then exasperation with technology brought in to make the process of buying a house “less complicated and less painful.”

I am categorically in support of innovation and investing in technology that supports better customer outcomes and experiences, and, frankly, makes our professional lives easier and less fraught with indemnity risk.

But I also get exasperated by the idea that old and traditional is bad and new is good. It is a binary distinction that makes a snappy soundbite, but it really doesn’t mean very much. More accurate would be to say, some old technology is no longer optimal or is redundant now and some new technology could do the old jobs a lot better.

Some old technology and processes are, however, unbeatable – especially where complex experience and judgement are required –because they have been finessed over hundreds – yes, hundreds – of years. The wheel remains round, so to speak. It can go faster, but it is still round. When the uninitiated come to market claiming to have found the holy grail that will solve everything, that’s when the rest of us sigh and wait for the moment they realise it’s not that easy. Nothing ever is.

Therefore, we need agility of thinking when it comes to new propositions. When one comes to market and is as successful as, for example, our cladding database, we need to understand that new digital propositions may not involve repeating that same proposition. They may use data, and they may use technology, but their application and audience may be entirely different.

It’s why we are working on a myriad of new possibilities all the time. We need to ensure, as does every new business, that when we invent, we are also alive to the possibility that we should not tie ourselves to the original idea and hammer, hammer, hammer away at delivering the perfect version of that idea until a) someone else does it, or b) the market no longer needs or wants it (if they ever really did).

There’s a salutary lesson in this. Fixed ideas are rarely good ones. Like it or not, the world is a place that works for everyone only if there is compromise and openmindedness. The product you begin to design may not be the one you eventually put to market – but that is agility.

Refusing to adapt is likely to result in Canute-type behaviour that ultimately leaves everyone in deep water. Even choosing to change from one absolute to another absolute fails to recognise that the need for that change will continue to evolve and will necessitate further change.

My point is that if businesses – we, in other words – want to have a chance of thriving as well as surviving then we need to find a way to build a model that reacts to change as and when it happens and is required.

Consider our market and the changes we have had to deal with in under a decade: the Mortgage Market Review, the Mortgage Credit Directive, various Basel regimes, changing monetary policy, capital adequacy rules, affordability and risk weightings, changing stamp duty rules and the withdrawal of tax relief for some parties and not others, energy efficiency thresholds (still to come), leasehold liabilities being legislated upside-down, our ageing population – this list could go on.

I am sure that generations before us must have believed they lived through unprecedented change, and the risks currently facing the UK housing market may, in geopolitical terms, be trivial by comparison. Nevertheless, they are material to homeowners, landlords, and institutional property owners, as well as to the banks and building societies that underwrite that ownership.

These things change, and as we assess them, so might our propositions – even if we currently think we have the right answer. Pivoting in response to these changes is important if, ultimately, we are to produce real value for our market.

Gather your intelligence. Be prepared to change your mind if or when your information changes. And invest in processes, technology, and systems that deliver what you need to remain agile. That way we all benefit from agile thinking. M I