Maybe we have already seen the biggest shocks of this extraordinary period of political turbulence, but who would make a forecast at this particular time? Despite all the uncertainty, however, people will still want to move home and to remortgage. So while the politicians try to work out what happens next, for lenders it’s business as usual – as they try to help their customers fulfil their aspirations.
In times like this, the CML is doing all it can to promote stability in housing and mortgage markets. So now that Theresa May has appointed her ministerial team and re-shaped some government departments, we have been strengthening our links with key offices in Number Ten, the Treasury, the Department for Communities and Local Government and elsewhere. We have also been building our contacts with the UK’s devolved administrations, and with the appropriate mortgage market regulators – putting out the consistent and clear message that the mortgage market is open for business.
And as we continue our discussions with ministers and officials, we will be arguing that lenders and borrowers need as much certainty as possible about the future direction of government policy.
In the meantime, it has been re-assuring to see the Bank of England and regulators committing themselves to appropriate action to deal with any turbulence in financial markets. The Financial Conduct Authority has moved to clear up uncertainty by reminding everyone that, in the aftermath of the referendum vote, all existing regulation still applies – whether or not it derives from EU legislation.
There have also been re-assuring messages from other regulators and from the Financial Policy Committee, which helpfully moved to provide more flexibility for firms by reducing the counter-cyclical capital buffer.
But even though the Bank has said it can and will deploy a range of measures to ensure there is sufficient liquidity, lenders will be heartened to see that retail funding markets are continuing to function in any case. They will be reassured that the Bank will carry on monitoring developments, and we do not foresee lenders suffering any significant disruption as a result of illiquidity.
The Bank decided against a rate cut in July, although it is predicting some form of monetary easing in August. Even if that does mean the first Bank rate cut in more than seven years, borrowing rates are already at an historical low point. The average mortgage rate has fallen from 3.8% to 2.9% since the last rate change in 2009. This shows that the mortgage market remains in good health. Funding remains available, and lenders are resilient and open for business.
Recent movements in borrowing rates also help reinforce that Bank rate is not the only influence on mortgage pricing. This will be a key message for the CML if and when the Bank acts on rates in the coming months. We will seek to ensure that commentators understand that mortgage rates are determined by a range of factors, including funding costs, competition in the market, targeted levels of profitability, and pricing based on an assessment of current and future market expectations.
We will also draw on our data to show how existing borrowers may be affected by any cut in Bank rate. Around 90% of new borrowing is undertaken at a fixed rate, and half of the UK’s existing borrowers already have this kind of mortgage. They will not see any immediate change to their payments in response to a Bank rate cut. But new fixed rates are already competitively priced, and that makes them even more attractive to consumers looking for certainty about future outgoings in an uncertain world.
Among those homeowners with a variable-rate mortgage, more than 1.5 million – and perhaps as many as 1.8 million – have a tracker mortgage. The overwhelming majority of these loans track Bank rate, so these borrowers will – depending on the precise terms of their mortgage contract – automatically see a rate reduction. But some may find their loan has a collar below which rates cannot fall.
Clearly, the future direction of the economy remains uncertain following recent events. Caution by those thinking of buying a home is therefore understandable and, given that many transactions are discretionary, we may see a decline in lending for house purchase in the coming months. This may be offset by an increase in remortgaging as borrowers move to take advantage of record low rates. But at this stage it is too early to predict the balance between the two – and what the overall outcome will be.
That is why we have decided against publishing the usual mid-year update of our mortgage and housing market forecasts. We agree with the Bank, however, that, while there is considerable uncertainty, this is not like the financial crisis of 2008. Lenders, and the financial sector more generally, remain resilient.
So it looks to us as if it will be borrower demand and how this is shaped by consumer confidence – and not credit supply – that will be the biggest factor in determining what happens from here.