Mortgage market review

In recent years the mortgage industry has gone through some testing times. Recession and regulation have led to more stringent lending conditions in the market, making it harder for many would-be purchasers to secure credit for their first, or indeed, next property acquisition. 

But thankfully brokers are now finding it easier to source a mortgage than at any time since the Mortgage Market Review (MMR) in April 2014, which was set up to analyse the industry and how advice was provided to clients, having an adverse impact on many lenders and brokers.

With the economy strong, the mortgage market has now returned to near pre-2008 levels, with 30% of mortgage brokers reporting that they had no problem sourcing a mortgage for any client-type in the second half of 2016, according to the latest statistics from the Intermediary Mortgage Lenders Association (IMLA).

The figure represents an increase on the 26% recorded in the first half of the year and is double the 15% rate noted in H1 2015, amid signs of improving lending conditions and strengthening relationships between lenders and brokers.

Only 16% of brokers said they were unable to source a mortgage for first-time buyers in the latter half of last year, down from 29% in H1 2016, while the proportion of brokers who were unable to source a mortgage for standard status borrowers dropped from 26% to 15% over the corresponding period.

Brokers are also finding it significantly easier to cater for non-standard borrowers, including the self-employed and those who have irregular incomes.

Peter Williams (below), IMLA’s executive director, said: “It is hugely encouraging to see a greater number of brokers are reporting that they are successfully arranging mortgages for a wide variety of clients. 

“Over the past few years, regulations like the MMR have raised the bar in terms of borrowers’ requirements, which some predicted would leave many borrowers locked out of the market. This new regulatory regime has made the intermediary channel more important than ever, and brokers are clearly doing a great job of helping people get a foot on the housing ladder.”

Mortgage lending 

Despite improvements in the mortgage market, lending to home buyers actually fell to a near two-year low in January amid a ‘stubbornly persistent’ lull in moving activity, the latest data from the Council of Mortgage Lenders (CML) shows, while remortgage lending continued to outpace the rest of the market.

In January, 45,700 home loans were secured by property purchasers collectively worth £8.4bn, down 28% on December and 1% from the corresponding period last year.

Buy-to-let property purchase activity ‘continues to be weak’, which some analysts had expected to create fresh opportunities for first-time buyers.

However, the figures reveal that first-time borrowers took out £3.6bn of mortgages in January, down 29% from December, although this did represent a 9% increase compared with January 2016.

Those moving home borrowed £4.9bn in January, down 25% on December and 4% year-on-year. This equated to 23,000 loans, a fall of 27% month-on-month and 7% compared to January 2016.

CML director general, Paul Smee, commented: “We expect a seasonal dip in activity in the winter months and this appears to be the case in January.

“However, the lull in moving activity appears stubbornly persistent, and we have commissioned research on the reasons why the number of transactions seems in secular decline.” 

Remortgages 

Remortgaging activity, which was up 54% by value and 46% by volume on the previous month, dominated the market in January, according to the CML, as many existing home owners looked to take advantage of record-low borrowing rates. 

The rise in remortgage activity echoes separate data published by Paragon Mortgages which revealed that 39% of all mortgages handled by advisers in the final quarter of last year were remortgages – an increase of 7% on Q1 2016.

Best Buys - Direct Products – Remortgage Rates:

Source: moneyfacts.co.uk

Tony Catt, compliance consultant at TC Compliance Services, said: “I think remortgages have increased in popularity from the point of view that a lot of people would rather remortgage than pay the cost of moving that increased with the extra costs of stamp duty, and also the deals are now very attractive, so I can see that remortgage will be a major part of the lending field.”

Catt is among those who believe that lifetime mortgages - equity release – offer significant room for growth this year, 

Aside from equity release, many people seek to remortgage their homes in order to avoid reverting to the lender’s standard variable rate (SVR) at the end of a fixed term deal. 

Each homeowner with a SVR mortgage could be spending on average almost £3,200 a year - or £266 a month - more than necessary by failing to fix their rate, according to research by L&C Mortgages.

With more than a third - 36% - of homeowners still on SVRs, the mortgage advisor estimates that around 1.1 million households could collectively be paying almost £2.8bn more than they need to by sitting on the wrong mortgage deal.

Somewhat shockingly, over half - 58% - of mortgage borrowers have never re-mortgaged to save money, L&C said. 

David Hollingworth (left) from L&C Mortgages commented: “It’s worrying to see so many people still on a Standard Variable Rate mortgage as they are not the cheapest rates available. Not only is there a lack of awareness around how much could be saved but worse still a huge number of people have never even tried to remortgage to get a better deal.

“With the cost of living on the rise and day to day expenses like energy prices soaring, it is hugely concerning to see that people are paying so much more than they should be.”

“Not only have we found over a third of homeowners are on their bank or building society’s standard variable rate, but 3.4 million people don’t know their mortgage rate – the chances are they could potentially save hundreds or even thousands of pounds a year by re-mortgaging to a new deal,” he added.

For those borrowers currently looking to switch to a fixed rate product, the average two-year mortgage deal has dropped to 2.32%, down from 2.55% in April 2016, according to Moneyfacts.

A similar pattern can be seen across longer-term fixed rates, where the average five-year fixed rate stands at 2.91% down from 3.20% this time a year ago, the finance website added. 

“There is still very much a sense of competition amongst lenders looking to attract new borrowers, which is why we have seen rates falling further since the start of 2017,” said 
Rachel Springall (right), finance expert at Moneyfacts.

It is not just attractive rates that can pull in new business, with incentives also proving popular with borrowers as a cost-effective package, according to Springall. 

She added: “A free valuation is a common feature among the best buys for those remortgaing, as are free legal fees.”

First-time buyers

The proportion of new mortgages being taken out by first-time buyers reached its highest level since the Bank of England began keeping a record in 2007 during the final quarter of 2016. 

In the final three months of last year, 22% of new home loans were granted to first-time buyers, the second quarter in a row in which the proportion hit a new record.

Best Buys - Direct Products – 1st Time Buyer Rates:

Source: moneyfacts.co.uk

Reflecting on the existing range of first-time buyer mortgages available, Springall said: “first-time buyers have a raft of deals to choose from, with exciting incentives including Principality Building Society’s offer of £1,000 cashback on some of its best buy mortgage deals. This could really help those who are plunged all their savings into their deposit and legal costs and are looking for a little extra for additional funds.”

Buy-to-let mortgages 

The number of buy-to-let loans secured by buy-to-let landlords increased in January to the second highest monthly level since the introduction of the 3% stamp duty surcharge on second homes in April 2016, behind November 2016, the latest figures show.

But rather than new loans to invest in new private rented housing, this activity was actually driven by buy-to-let remortgage lending which accounted for more than two-thirds of total lending.

The volume of loans for buy-to-let home purchases advanced in January was at an eight month low, owed in part to the traditional seasonal dip in activity in the winter months.

By contrast, buy-to-let remortgage lending was at its highest monthly level, alongside November last year, since the stamp duty reform was introduced.

“There are some fantastic deals out there for buy-to-let, with low rates and decent incentive packages available to reduce the cost of the mortgage itself – particularly as some rates are priced in at sub-2%,” Springall explained. 

Virgin Money, for instance, is currently offering a buy-to-let deal priced at 1.54% fixed until 1st September 2019 for borrowers with a 40% deposit, subject to a £1,995 product fee and £500 cashback, but overall, the average fixed buy-to-let mortgage comes in at 3.34%, down from 3.63% a year ago, according to Moneyfacts.

Best Buys - Direct Products – BTL 1st Time Landlord Rates:

Best Buys - Direct Products – BTL 2 Year Fixed Rates:

Source: moneyfacts.co.uk

But while lenders are keen to attract new business in this area, the fact that mortgage tax relief is being phased out from this month and now that the Bank of England’s Financial Policy Committee has been granted greater powers over the buy-to-let market, making it harder for many buy-to-let landlords to get a mortgage due to new tougher mortgage affordability tests, the reality is that activity levels in the sector look set to slow in the coming months. 

The CML’s Paul Smee (left) commented: “Buy-to-let house purchase activity continues to be weak, despite strong buy-to-let remortgage levels. This will likely remain so going forward as lenders tighten affordability criteria ahead of the PRA mandated stress tests, and the introduction of tax changes in April.” 

John Heron, managing director of Paragon Mortgages, agrees that landlord confidence “may be eroded” as the mortgage interest rate tax changes filter through between now and 2021. 

“This could well result in a reduction in the supply of property to the sector and, in turn, higher rents,” he said.

Company structure 

From a landlord’s perspective, it has been a tough year, with a raft of changes, including higher stamp duty, tougher mortgage lending conditions and the phasing out of mortgage tax relief, leaving many buy-to-let investors with little alternative but to turn to incorporation as a way of maintaining investment levels in the private rented sector.

Unsurprisingly, there has been a significant increase in the number of landlords using limited companies to manage their buy-to-let portfolios as a consequence of greater government regulation, according to new research.

Fresh data from Mortgages for Business shows that 77% of all buy-to-let purchase applications were made via a corporate vehicle in the first three months of this year, up from 69% of applications in the final quarter of 2016 and just 21% prior to the tax relief changes being announced by the now former chancellor George Osborne in the 2015 Budget statement.

In response to greater demand, the volume of products available to limited company borrowers has risen by more than a third to 266, with limited company rates now at a record low.

David Whittaker (right), CEO of Mortgages for Business, said: “With the changing face of the buy-to-let mortgage market, it is no surprise that lenders are keen to appeal to limited company borrowers.

“We have been recommending for some time that our clients seek professional tax advice to determine whether incorporation is the most suitable route for their circumstances, and these figures can only further encourage landlords to consider their position.”

Referrals – is there a conflict of interest? 

For many years some agents have earned money by referring customers to particular mortgage brokers - as well as conveyance and solicitors. But it has been suggested in recent weeks by the Homeowners Alliance that the practice is being ‘routinely abused in the interest of profit’, especially when it comes to offering potential buyers in-house financial services, and this is something that the independent organisation, which supports buyers and sellers, wants to see the government ban estate agents from doing. 

It told This is Money that it believes there is a clear conflict of interest in estate agents offering in-house services for buyers, mainly because there is a risk the agent will encourage the seller to accept an offer from someone who has agreed to use their in-house services in order to maximise profits.

Paula Higgins, chief executive of the Homeowners Alliance, said: “Estate agents are instructed by - and thereby work for - the seller. 

“Yet by offering financial services such as mortgages to clients the line between whose side they’re on becomes blurred.

“Invariably, it seems they are acting in their own best interests rather than either parties.”

The Homeowners Alliance is launching a campaign to make the government take action, in the interest of both buyers and sellers.

Higgins added: “Buyers who speak to in house brokers also end up giving detailed financial information to the estate agent that can totally undermine their own negotiating position.

“If the estate agent arranging your mortgage knows you can in theory afford as much as £270,000, you are not going to be able to dig your heels in arguing that you can only afford £260,000.

“Meanwhile sellers can lose out because estate agents have an incentive to give preferential treatment to buyers who use their services, rather than the buyer who offers the best price.” 

The rules around in-house services are outlined in the Estate Agents Act 1979, which is enforced by National Trading Standards Estate Agent’s Team of Powys County Council.

At the end of last year, the Financial Conduct Authority said that it would look into links between estate agents and mortgage brokers as part of a review of the mortgage market, which was first announced in May last year. 

The regulator also expressed concern that relationships between brokers, lenders and estate agents were creating conflicts of interest by forcing some consumers to spend more money than necessary when it comes to being pressured to use particular firms. 

Some estate agents imply that using a particular broker might be “necessary to view or secure a property,” the report said. 

It also said that fees paid to brokers by lenders when mortgages are completed might tempt brokers to recommend these mortgages, even when they are not necessarily the best available for the buyer. 

“It’s not fair that buyers should be penalised if they don't use an agent’s in-house broker and consumers should not be made to feel that without using the recommended financial services provider they will lose out on the home they want to buy,” said Mark Hayward (right), of the NAEA. 

There could soon be tougher controls in place when it comes to mortgage referrals. Watch this space.

*Marc Da Silva is Estate Agent Today and Letting Agent Today Features Editor. You can follow him on Twitter @propertyjourno