So, what does the current market look like? The Bank of England Monetary Policy Committee sets monetary policy to meet the 2 per cent inflation target in order to help sustain growth and employment. While inflation has already reduced significantly from the double-digit level of late 2022, it currently sits at 6.7 per cent overall, or 6.2 per cent excluding food and energy, and the Bank of England says it expects inflation to drop significantly during the remainder of 2023.
Despite holding firm this month, financial markets are still forecasting that UK base rate could peak at around 5.75% or possibly 6% by the end of 2023 or early 2024, before falling to around 4.5% by 2025-26.
Which borrowers are being turned away from high street lenders?
As I recently reported before the summer, it was young borrowers who are finding it difficult to get mortgages. In most recent years of benign interest rates, we will recall that it was LTV (Loan to Value) ratios that was the challenge to borrowers, in other words having a sufficient deposit to meet the lenders LTV requirements. Today, it is no longer the LTV that is the challenge but meeting the lender’s “affordability” checks, given the increasingly high interest rate environment, which has already seen UK base rate increase from 0.1 per cent last year to the current level of 5.25 per cent.
Not only young first-time buyers, it is also property landlords that are impacted, although arguably to a lesser degree with rental demand for properties becoming so strong, due to lenders having re-evaluated their affordability criteria, i.e. stress rates affordability thresholds, in some cases to over 7 per cent or even 8 per cent.
What is the consequence?
It is now increasingly difficult to comply with Lender’s DSR (Debt Service Ratio) requirements to meet their affordability checks and a solution amongst high street lenders has been to extend the mortgage term. Historically, this was usually 25 years or less whereas, in some instances, we are now seeing terms of up to 40 years commonly being used to reduce monthly outgoings to more affordable levels.
Off the high street, here at Standard Chartered Private Bank, it is usual that clients maintain significant Assets Under Management (AUM) with us. As a result, our affordability checks will take the client’s net worth as well as liquidity with us into account, which in turn enables us to provide tailored credit solutions to help navigate the currently very difficult market conditions.
What is the conclusion?
Liquid borrowers and/or cash buyers are seeing the current shape of the market as an opportunity to buy properties, particularly those that are unexpectedly coming to the market. As I also recently reported, these sales transaction will create tomorrow’s valuation comparables and, consequently, we cannot expect any early pick-up in property prices. However, as inflation gets under control, and we tiptoe ever closer towards the next UK General Election, so interest rates will soften and so the UK mortgage market will open up once again.
