More mortgage innovation expected next year

Spicerhaart said it expects gross mortgage lending to flat line next year to reach £135 to £140bn, as liquidity remains an issue but said it expected lenders to innovate further despite a UK lender drive to repair balance sheets.

Banks and building societies are obliged to repay the £165bn Bank of England Special Liquidity Scheme in 2011, which will further subdue gross lending, along with the Basel III balance sheet requirements and the Mortgage Market Review, said Spicerhaart.

But Steve Cox, operations director at Spicerhaart Financial Services, said he expects a few more 90% Loan-to-Value products with tight criteria but 95% loans are unlikely to reappear.

However, the buy-to-let market will be driven by first-time buyers locked out of the market and homeowners voluntarily selling up because of affordability, coupled with new build stock and social housing failing to keep up with demand.

"The private rented sector will take up the slack as a longer term housing solution for many," he said.

Remortgage volumes are likely to increase, said the firm, if interest rates start to tick up as those on tracker rates move to fixed rate deals.

"However, many borrowers won't necessarily look to switch immediately as rates are likely to creep up slowly," said Cox.

Spicerhaart thinks rates will rise by 0.25% each quarter from the end of Q2 to end the year at 1.25% pushed by rising inflation.

It also predicts national house prices will fall in the first half of the year but pressure from housing shortages will counterbalance the lack of mortgage finance and affordability issues.

Property prices are likely to rise in London and selected suburban and metropolitan areas such as the M4 corridor, it said, which will further widen the North-South price divide. The price differential will broaden in areas where public sector unemployment is unlikely to be assuaged by the private sector, including Northern Ireland, South Wales, parts of Scotland and the North. These areas are likely to see a continued fall in transaction levels with prices squeezed lower, said Spicerhaart.

Alison Beech, business relationship director at Spicerhaart, said: "Lending will remain hugely constrained for those who do need to move house and many homeowners will hold off applying for mortgages in the first place, paralysed by fear of the rising cost of living and falling household income. The gap between the housing markets of the South East and the rest of the country is set to become even more pronounced, exacerbated by foreign buyers and city bonuses."

The firm predicts repossessions will increase by 10-15% next year, by approximately 10% to 15%, as interest rates begin to creep up against a backdrop of high public sector job losses.

"Financial pressure will drive an increase in family breakdowns and the lack of equity in many homes will leave borrowers unable to refinance to a more affordable rate or trade out of trouble by downsizing," it said,  athough it expects 2012 to see a surge in repossessions.

Mark Pilling, managing director at Spicerhaart corporate sales, said: "Redundancies in the public sector plus a 1% interest rate hike would tip a sizeable number of borrowers over the edge, so if interest rates reach 1.25% by the end of 2011 we would expect to see repossessions begin to rise quite suddenly in early 2012."

Assisted Voluntary Sales will become an increasingly important feature of the market as the number of struggling households grows and lenders continue to make a concerted effort to explore alternatives to repossession, said the firm.