Thu, 02/08/2018 - 14:30
Lee Layton, Associate Director of Residential Research, at Cushman & Wakefield, comments ofn the Bank of England’s unanimous decision to raise interest rates…
Today’s announcement that the Monetary Policy Committee (MPC) have voted to raise the Bank of England interest rate to 0.75 per cent took few by surprise due to the messages coming out of the Bank of England for the previous couple of months. Most forecasters now have one 25 basis point rise pencilled-in for each of the coming years.
The accompanying mortgage rate increases will no doubt lead to concerns of an increase in the number of forced-sellers and a subsequent housing market downturn. However, it is worth considering how the current lending landscape compares to recent times.
As highlighted in the adjacent graph, from 2008, lenders have completely altered their approach to higher-risk lending, with the percentage of new mortgages issued with Loan-To-Value (LTV) ratios of 90 per cent and over falling from over 16 per cent pre-crash, to under 4 per cent at present. The same trend is true when looking at interest only mortgages. In the period leading up to the market downturn, over half of new mortgages were interest only, but this figure has now fallen to just 20 per cent.
This sustained period of lower-risk lending coupled with the introduction of the Mortgage Market Review (MMR) has resulted in the number of borrowers at risk of default shrinking considerably during the last decade. Even in the event of falling prices and rising unaffordability, recent rates of house price inflation and rules within the MMR exempting pre-MMR borrowers from the new criteria when re-mortgaging, should ensure that the toxic combination of negative equity and the inability to service mortgage debt is avoided for all but a very few. Shorter-term risks are also greatly reduced, with a far greater proportion of borrowers on fixed rates, and a slim chance of anything but a gradual rise in rates.
The main area due to be impacted is the higher LTV mortgage market. BoE rate rises to 1.75 per cent would bring the average new mortgage rate to circa 3.20 per cent, and while this new rate would only be equivalent to 2014 levels, future affordability will be stretched when MMR ‘stress testing’ is applied.
The net result of the above will in all probability be a continuation of the present flat transaction levels and near-future rates of house price inflation more aligned to wage growth than has been the case in the previous 20 years.