Game of Loans – is winter coming for homebuyers?

Stark warnings have been issued from lenders and mortgage experts that the property market could soon get much tougher and loans more expensive. But there are still ways for the more shrewd homebuyer to fulfil their ambitions. Article by Nick Green.

Getting on the property ladder has never been easy for first-time buyers. However, soon it might feel as if it used to be. Growing economic uncertainty relating to both COVID-19 and Brexit is prompting lenders to tighten their purse strings, with first-time buyers largely bearing the brunt.

New research from comparison site Moneyfacts shows that average mortgage rates have started to creep higher. There has been an average increase of 0.09% on two and five year fixed rates since the start of July, bringing them up to 2.08% and 2.34%. Though this doesn’t look like much, it’s noteworthy because the Bank of England base rate remains at the record low of 0.1%. The increase is a reminder that lenders are both able and willing to raise their own rates independently in order to project their business.

This isn’t the only early warning sign. Another ominous development is the trend for lenders to shun the Bank of Mum and Dad. First was Nationwide, which set a new condition that first-time buyers must save at least 75% of their mortgage deposit themselves, with only a quarter at most coming from parental donations – regardless of their ability to afford the repayments.

This apparently draconian measure was followed closely by Lloyds withdrawing their ‘Lend a Hand’ mortgage for new applicants. A form of guarantor or family offset mortgage, this loan allows parents to put down a 10% deposit on a temporary basis (three years) and get their money back at the end – with 2.94% interest to boot. This enabled buyers effectively get a 100% mortgage, deposit-free. The assumption was that house price increases over that time would make this ‘everybody wins’ arrangement possible. The axing of the Lend a Hand mortgage is a sign that Lloyds no longer expects house prices to increase sufficiently to justify this offer.

Thirdly, Moneyfacts reports a sharp drop in the number of high LTV mortgage deals available. This time last year there were 758 mortgage deals available with only a 10% deposit. Now there are just 46, and the number may shrink further. Withdrawal of low-deposit / high LTV mortgages is a further indication that lenders are no longer confident of house price increases, and may even be fearing a price drop.

Housing market showing signs of strain

There is a danger that by making the market increasingly inaccessible to first-time buyers, the prediction of house price drops may become self-fulfilling. At a stroke, three major stepping stones for new buyers – deposits gifted from parents, family guaranteed mortgages, and 90% mortgages – have become much harder to come by. This is very likely to restrict the flow of new buyers coming onto the market, which may force prices lower, which in turn will make lenders more jittery and prompt them to tighten their lending criteria even further, in a downward spiral.

It’s too early yet to see if this effect is taking place, because the property market is still surfing on the mini-boom resulting from the lifting of lockdown. The Chancellor’s stamp duty holiday is also expected to deliver a boost, although early reports of its effects are mixed. Online mortgage broker Trussle has reported no sudden spike in enquiries from homebuyers, which is rather at odds with anecdotal reports that the stamp duty cut has led to bidding wars. It also found no significant increases in offer sizes or in the price of properties being searched for. This suggests that buyers hope to pocket any savings from the stamp duty holiday, rather than use them to buy more expensive homes. This is another sign of growing caution in the market.

Trussle did observe one area that was increasing: remortgages. Again, this shows that more homeowners who might otherwise be considering moving up the property ladder, are choosing to stay put in spite of the stamp duty incentive. Meanwhile first-time buyers, who are the hardest hit by other recent developments, don’t benefit greatly from the holiday since few pay much stamp duty anyway.

Many prospective buyers would agree that a managed reduction of house prices might be no bad thing. What matters however is not so much price but affordability. If the right mortgage deals are not out there for new buyers, homes might become much less affordable despite being technically cheaper. This is the balancing act that banks and building societies now face.

What should homebuyers be doing now?

Eleanor Williams, financial expert at Moneyfacts, believes that the historic low mortgage rates seen recently may be coming to an end. ‘It seems unlikely that the mortgage sector will bounce back to the level of availability that we saw six months ago,’ she said, and suggested that homebuyers and remortgagers would do well to lock into a five-year fixed rate deal now. ‘[This] would protect from future interest rate volatility over the next 60 months. Those looking to secure a new deal now may wish to move swiftly.’

Although five-year fixed deals come with higher interest rates, these may still work out cheaper for many homeowners in the long run. Even if interest rates do not rise, there are costs involved in remortgaging, which may cancel out any savings. Furthermore, no-one knows yet what mortgage deals may be available in two years’ time, but as things stand it seems unlikely they will be more generous than they are now. Finally, there is the real risk that mortgage rates could rise further in the interim.

With so many sources of help apparently drying up, what can first-time buyers do? Well, regarding deposits gifted by parents, there are plenty of lenders who – unlike Nationwide – will still accept deposits gifted by parents. There are also guarantor mortgages, family offset mortgages and family deposit mortgages still available despite the Lloyds decision, where parents want to help their children without gifting a lump sum. Some smaller lenders may even retain their 90 per cent mortgage offers for a while yet.

Not every deal is available on the open market, however, as some can only be accessed exclusively via mortgage brokers. Buyers in the home-hunting stage can work out roughly how much they can borrow using the Unbiased Mortgage Calculator, then contact a mortgage broker when ready to make an offer.

Some buyers may be reluctant to jump on the property ladder amid warnings of future price drops. Some may bide their time waiting for bargains to appear. Again, the issue to bear in mind is one of affordability, not price alone. If prices drop in the year ahead but fewer mortgage deals are available, homes will become less affordable, not more. Therefore, first-time buyers in a position to purchase a home now should probably still go for it, on the basis that buying won’t necessarily get easier and may well get harder.

Likewise, sellers would do well to sense the mood of the economy, and not hold out too long for unrealistically high offers. A pragmatic approach from all players in the housing market should prevent things from becoming too ‘Game of Thrones’.