The latest figures included in UK Finance’s Household Finance Review will not make for particularly pretty reading for mortgage market stakeholders, and will perhaps draw into question the lack of any significant housing/mortgage-related announcements in the Autumn Statement.
While the figures will probably not surprise anyone working in the industry, they do show a sector having to deal with ongoing drops in activity, lending, and subsequently the ability to generate income given that most only earn when completions take place.
Purchase business in particular is of course the significant worry in the market, and during quarter three this year – the period covered by the latest Household Finance Review – we can see that mortgage lending for purchase, to both first-time buyers and home movers, continued to fall.
Indeed, it has dropped in every month since December 2022, up until September 2023, and while there was a moderation in the rate of fall of lending to first-timers, it was down almost one-fifth compared to Q3 2022.
Now, of course, the full impact of the ‘Mini Budget’ was not being felt back then, and you might expect lending to first-timers to be down on that three-month period, particularly given everything that has happened in the market since then, but close to a 20% drop is still not a great look for the market.
If there is a slight hint of a silver lining in terms of first-time buyer lending, it comes with the fact it’s a sector which has not been as hard hit as others over the last 12 months.
First-time buyer activity is down 22% down in the first nine months of this year compared to the same period in 2022, but it has not dropped by as much as it has for home movers, who have seen a 26% drop.
And, even for those younger first-time buyers who you might expect to be even more impacted by higher rates hitting affordability, the activity levels of those under 30s has still not dropped by as much as it has across the wider house purchase market.
We saw this in 2022 as well, with a degree of first-time buyer resilience being evident, and this appears to be the case again in 2023. Last year, first-timers were the most prominent purchasers in the market, and while it’s too early to say whether this will be replicated in 2023, one might expect it to be the case.
As mentioned, a higher rate environment has done some fairly significant damage over the course of the last 12 months, and first-time buyers coming to market now are clearly having to factor in a rate environment which is very different to the one that was the norm for the last decade or so.
Those higher rates, particularly at higher LTVs, are clearly influential in the ability of first-time buyers not just to meet affordability, but in terms of the loans they can achieve, the homes they can put offers in, and indeed the terms over which they have to take out a mortgage.
There has been a noticeable uptick in the number of first-timers picking longer mortgage terms, so they can have more manageable mortgage payments in the early days of their mortgage.
However, the Household Finance Review suggests that this might have ‘reached its limit in the current higher rate environment, meaning that those with smaller deposits or needing to borrow more relative to income are facing much greater challenges in meeting affordability rules’.
Since September of course we have had a more benign rate environment with no Bank Base Rate changes from the MPC becalming money markets, and with swaps falling. This has allowed large numbers of lenders to drop rates, which again in the months ahead should be able to feed into a better affordability situation for borrowers right across the board.
For first-timers who only have smaller deposits the rate falls have not been as substantial as for lower LTV products, but you might expect this. However, we have seen an increase in higher LTV product options, and given the need to secure business volume and margin, we might expect more lenders to improve their high LTV offering during 2024.
Overall, it would make sense for lenders to keep assessing their options in the high LTV space, particularly in using private mortgage insurance to mitigate their own risk but to also bring rates down further. This would open up further options for those first-timers who cannot access parental help, but who have every right to try and get their foot on the ladder.
At present 2024 looks much more positive – certainly when compared to the mid-period of 2023 – and, without any noticeable dial-shifting measures from the Government, it will be up to the industry itself to drive forward options and to provide as many high LTV products as possible to support those who can raise a 5% deposit and who want to make that homeowning dream a reality.
Patrick Bamford is head of international business development at Qualis Credit Risk, part of AmTrust International
