There are a variety of reasons for this, but anecdotally these include the lack of supply for properties in this space; an understanding in this space that mortgage rates ‘are what they are’ so the higher rate environment is not causing people to not move or delay; offshore buyers wanting to take advantage of what they see as a temporary softening to UK house sale prices; and importantly the improved mortgage lender criteria and appetite in this market.
In the large loan and high-net-worth (HNW) mortgage market specifically, lenders are looking to substantially increase their focus in this area. We have seen new access granted to several bespoke underwriting teams at major high street and building societies banks for loans over £1m. Working closely with these underwriters means me can obtain increased flexibility and manual underwriting for clients, which is important as with the affordability challenges built within criteria through stress testing currently, and the fact that in this space no two clients scenarios ever look the same, this flexibility is vital to getting the finance to work.
We are finding more lenders are able who will take a view on complex income streams, for example monetising assets to help achieve the borrowing required. I recently did a large loan case with LiveMore, for example, where the affordability and maximum borrowing was based on the clients assets, which gave a much higher borrowing figure than any other high street lender or private bank would offer, showing the innovation also now coming to the HNW mortgage market and large loan space.
On top of this, we are seeing the private banks hungrier than ever to work closely with intermediaries, as they realise the high street lenders increased flexibility represents a challenge to their normal lending volumes.
The prime mortgage market
Over the past quarter, we have seen interest rates rise to 5.25 per cent, although this was held at September’s MPC meeting. Given this and with overall inflation on a downward trajectory, and the Bank of England forecasting inflation to fall ‘significantly’ (around the five per cent mark by the end of the year), swap rates which are often a strong guide to mortgage fixed rate pricing, have actually stabilised in recent weeks with an expectation from the markets that we are now getting close to an interest rate peak.
In fact, at the time of writing, swap rates have actually been gradually reducing. For those securing mortgages, rates have begun to stabilise once more on the back of these forecasts. Large high street banks have led the way with recent rate reductions, and lender competition is a major factor for lenders using rates as a lever to maintain or increase market share.
The gross mortgage market is forecast to be quite significantly down this year on the back of market conditions, but with lenders keen to maintain or increase their market share this has actually created some enhanced criteria and options for clients still active. It should also be noted that the mortgage lending of 2022 and 2021 were unusually high, with the pre-Covid figure of £249bn in 2019 a more appropriate guide on a normal market.
Positively, the markets are showing signs of confidence with rates reducing again in the medium term. Five-year pricing is lower than two-year, with a market leading five-year fixed rate approximately 0.4 per cent lower than the market leading two-year option. Regardless of this, we are seeing an increase of clients taking short-term products, for example tracker rates, as they bet on the rates continuing to reduce in the foreseeable future. A significant advantage of these tracker products is that they often have no early repayment penalties. As a result, we are finding HNW clients in particular are very keen on snapping up the opportunity of this flexibility to overpay their mortgage by liquidising other assets in this higher mortgage rate environment.
We are also seeing increased demand for offset products. When mortgage rates began with a one per cent, clients preferred to use their money elsewhere, but we are finding now the ability to offset the mortgage interest rate, but retaining the flexibility to access the funds still at any time, is seen as a huge benefit.
Prime property market
In exploring the trends of the quarter, it’s wonderful to see the prime property market holding strong, despite challenges across the general market. It’s, therefore, unsurprising that competition remains fierce across the prime market as we continue to see best and final bids with multiple offers at the table. London continues to dominate the sought-after areas of residency with Mayfair (W1), Belgravia (SW1X), South Kensington (SW7) and Notting Hill (W11) leading the way. All of which are benefiting from retained property value and as such, a desirable magnetism of buyers.
To secure these purchases quickly, most HNWIs are opting for high-value mortgages set up on an interest-only basis to keep initial monthly payments lower, with a view to repaying the loans through overpayments in the early years of the term. In doing so, overall liquidity remains intact with only a small outlay required to service the interest.
For investors, we are also seeing an increase in large buy-to-let portfolio landlords looking to restructure to raise capital and fund property refurbishment works to satisfy EPC legislation (although this is now somewhat moot after the PM’s speech last week), as well as a move towards holiday lets to take advantage of favourable tax strategies.
For clients looking to snap up advantageous opportunities in the market, the current landscape is for some, surprisingly, considered a buyers’ market.
