Spring is almost upon us and the mortgage industry readies itself for yet another challenging year. Last year was full of surprises and we saw many changes in the market that enhanced our outlook on how we would do mortgages going forward. Now in 2006, we find ourselves once again within the boundaries of change heading towards Spring. Before speculating about what the future holds, let us have a look at back over the past few months in order to see how the market has taken the developments on board and where it could be heading in 2006.
December has been an excellent month for the mortgage market. This was unexpected for the experts as traditionally, trends have shown a steady decline towards the closing stages of the year. Despite the traditional fall during the Christmas period for mortgage approvals, the market saw a rise in advances over the month of January. The figure rose to a total of £26.9bn, breaking previous seasonal precedents as reported by the British Bankers Association (BBA).
The Council of Mortgage Lenders (CML) provided further evidence of a resurgence in the housing market as gross mortgage lending totalled £23bn in January. Down by 14 per cent on December’s total of £26.9bn, the figure was still a third higher than the gross lending of £17.4bn in January 2005. The CML also noted that lending figures typically weaken in January but contributed the increase to consumer confidence in the market and the expectation of stable interest rates.
Michael Coogan, director-general at the CML, said: “Mortgage lending in all categories has been strong in recent months. This reflects the fact that consumers are feeling more certain about the future of the housing market and confident that house prices are unlikely to fall. The mortgage market looks set for continued steady growth against a backdrop of pretty positive economic conditions.”
Seasonal trends show a steady decline over the latter months of the year with a clear resurgence coming up to the beginning of Spring. Mel Brooks talks about Springtime for Hitler in the hit musical comedy The Producers, however Springtime in the world of mortgages traditionally reflects a positive climb in the market.
Feel good factor
One aspect of Spring mortgages not often referred to in statistical data is the ‘feel good factor’. The Winter months play a big role in the housing market, as the majority of people prefer to stay at home with a warm cup of hot chocolate, marshmallows and a nice fire trying to sit out the Winter cold. Come Spring and the tables are turned. Buyers, now newly inspired by the thought of beer gardens and strolls in the park, look to properties that can offer more than just watching movies in the lounge. As Spring draws near, we can expect a climb in purchase figures of properties with available gardens as buyers look to get the most out of the short-lived Summer.
Lender competition
Reduction in market rates at the start of the year has seen fixed rates camped down below the 4 per cent mark.
The coming Spring will see strong competition between lenders. This year we can expect more big names to enter the market as well as some familiar faces trying out a different approach. Alliance & Leicester has revealed it is planning to enter into non-conforming, near-prime, self-certification and buy-to-let markets later in 2006; Oakwood will be launching in October and then there is news of Deutsche Bank looking to break into the mortgage market. This will leave lenders scrapping for market share. The fresh blood injected into the mix will put pressure on the top lenders to approach the market in a different, more innovative way. Competition will be heating up to get business through the door and to claim a chunk of the ever eluding market share.
This is good news for brokers and their clients as the entry of new lenders into the market could see other lenders respond and the market seeing a possible price war. Lenders like GMAC-RFC will look to aggressively grow its market share and compete accordingly.
Bank Base Rates could play a major roll in stimulating sales that could see record lending figures during the Springtime as the demand for mortgages increases. Tying in with rates is the payment shock of loans granted two years ago. This can be countered by remortgaging as homeowners raise capital for extensions, reducing unsecured debts such as credit cards.
Rosy future
The buy-to-let market has seen a record high according to the CML. A staggering 130,400 loans were issued to people planning to rent out their new property in the latter half of 2005, breaking previous records. The strong showing amounted to a 40 per cent increase over the proceeding six months, when 93,400 loans were issued says the report, an increase of 39 per cent on the amount of loans during the second half in comparative to the first half of 2005.
The CML further reported record levels reached for the value of mortgage loans lent to buy-to-let customers. They amassed to £14.6bn in the second half of 2005 totalling an increase of 47 per cent on the start of the year. Following this performance, buy-to-let mortgages now represent 8 per cent of the value of all outstanding mortgages valuing an impressive £73.4bn. Existing landlords will look to add to their portfolios and the market can expect a steady stream of new landlords.
During this allowed period, the market also saw a slight softening of lending criteria. The average maximum loan-to-value (LTV) ratio for buy-to-let lending was 85 per cent, 80 per cent in the first six months. Further to the LTV increase were lower stipulations regarding minimum rental cover. Lenders expected monthly rental income to exceed mortgage payments by at least 25 per cent.
Regarding these findings, CML director- general, Coogan said: “There was a notable pick-up in the buy-to-let sector in the second half of last year, so that lending in 2005 modestly exceeded the year before. In the wider mortgage market, we saw an 18 per cent fall in the number of loans for house purchase last year, so the strong buy-to-let data may partly reflect increased demand for rental property.”
Taking into account the current affairs in the market the future looks rose-coloured heading up to Spring and Summer. First-time buyers may still be an issue to deal with in the coming months as house prices steadily increases with the growing market. Fixed rates will most likely remain low and competitive products in circulation will benefit the customer.
With competitive interest rates, new lenders and Spring in the air it looks like this season will again bring a strong boost to the market benefiting customers and intermediaries alike.
Anna Bennett is marketing communications manager at GMAC-RFC
