Banks could increase flexibility and optionality for first-time buyers and homeowners in 2023 as pricing settles following September’s shock dislocations, according to a new report from Bloomberg Intelligence (BI).
The report suggested that the Chancellor’s meeting with the largest high-street lenders on December 7th reflected a growing recognition of the household squeeze – which is due to coincide with more than 1.5 million homeowners refinancing fixed-term mortgage deals through to early 2024.
Any relief that the removal of the 3% additional-interest-rate stress test for mortgage affordability in August should have brought has been rendered obsolete by a spike in standard variable rates (the default mortgage-pricing reset) to above 5%.
Mar’Yana Vartsaba, BI senior associate analyst (banks), said: “As banks are encouraged to support households, we believe that greater variable-pay inclusion and a focus on longer-term loan-to-income multiples are possible.”
The Bloomberg report also suggested that stresses are beginning to show in the mortgage market as rising base rates, mortgage pricing and an overheated housing market suggest that the mix and volume of approvals will now shift.
Higher house prices mechanically lift the size of the mortgage required and, together with post-lockdown demand, largely explain the rise in average monthly approvals toward £27 billion since mid-2020.
Additionally, Bloomberg forecasts that monthly re-mortgage volumes will continue to rise, while for home purchases, a monthly figure below £15 billion looks more sustainable as total mortgage approvals normalize to nearer £20 billion near-term.
The report found that lenders’ relaxed limits on variable compensation included in mortgage calculations from stricter rules applied during the early days of the pandemic.
This is increasingly key as mortgage rates above 5%, declining bonuses and falling house prices bite.
Barclays has doubled its annual bonus-inclusion cap to 50% from 2020’s level of 25%, while HSBC increased its terms in August, with the cap for regular overtime now 60%.
Santander has the highest variable-pay inclusion of 65% (unchanged from September 2020).
Professionals increasingly face a variable-compensation squeeze in 1H23 amid the deteriorating economic environment, with bonuses for investment bankers a good example, potentially declining by more than 40% on significantly weaker 2022 revenue.
