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Comment: Are mortgage lenders going after impossible targets?

By David Catt on 29 March 2016

As the EU referendum draws closer and the buy-to-let market prepares for incoming tax changes, uncertainty is prevailing in the mortgage market. So have targets been set too high for lenders this year?

All in all it seems that lenders enjoyed a strong finish to 2015. The Council of Mortgage Lenders (CML) reports that we saw £214bn of gross mortgage lending last year and if projections are to be believed, the upward trend seems likely to continue, despite the CML scaling back its forecasts from £237bn to £230bn. However, looking at how things are shaping up in the housing market, my feeling is that even the scaled-back target may be a tad optimistic.

Although we are only still in Q1, there seem to be a few factors creating a growing sense of uncertainty in the housing market. While we continue to see rising house prices in high growth cities such as London and Cambridge, overall our latest Hometrack UK Cities Index revealed that we have actually seen a slowdown in the volume of transactions over the last three years. London saw a 7% drop in the 12 months to January as price inflation rose 13.4% while the largest drop off was seen in Cambridge, where sales fell 20%.

The current political landscape isn’t helping either. With higher rates of Stamp Duty on the purchase of additional UK residential properties coming into effect in just days, there is a high risk that levels of buy-to-let investment will soften after the rush to beat the deadline. In addition, the evidence seems to suggest that the unknown outcome of the EU referendum will slow activity as borrowers delay purchasing until the thorny issue of Europe is settled one way or another.

So what does that mean for mortgage lenders? With transactions falling in London, this points towards an increasing reliance on writing more business on lower size loans in other parts of the country. Without larger London loans pushing up lending volumes there will be a need to work even harder to write enough business to hit the £230bn projection for 2016. Even so, there are two scenarios which may unfold and propel lenders towards their targets. The first is the potential of a post-Brexit surge in housing sales across the UK that offsets the drop in transactions in the capital.

The other potential saving grace is the burgeoning remortgage market. Approvals hit a two-year high in January as borrowers took advantage of the lowest mortgage rates since records began. Add in the left-field suggestion that the base rate may even be cut further and we could see a rash of remortgage activity to tie in even cheaper deals. Were that to happen, the increase in activity could see lenders carried closer to lending targets.

Perhaps the only certainty is that lenders will have to endure a nervous waiting game to see how borrowers react to the changing market conditions and potential headwinds. The bar set at the start of the year is not yet out of sight, but overcoming it looks a more daunting prospect than it did at the start of 2016. On the other hand, our experience over the past decade and a half at Hometrack has been that lenders are highly pragmatic in responding to changing conditions as they unfold.

 

This article first appeared in Mortgage Solutions

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