UK Mortgage Market Meltdown – A revival in mortgage demand thanks mostly to the Bank of England’s record-low base rate has been one of the wider recovery’s key drivers. But spiralling house prices and bloating levels of mortgage debt are one of the biggest risks to the economy, too.
UK Mortgage Market Meltdown – The Funding for Lending scheme provided banks with cheap state-backed funding on around £80bn of loans, reducing their costs by about £800m a year. This allowed lenders to pass the gains on to mortgage customers in the form of cheaper rates. The scheme had a dramatic effect – the average two-year fixed rate fell from around 3.75pc in June last year to around 2.5pc in September.
Other reasons for booming house prices
The Government also launched Help to Buy – a scheme designed to allow would-be buyers with a 5pc deposit to buy a home.
The first phase – an equity loan – allowed people taking their first step onto the property ladder to borrow up to 20pc of the value of a newbuild home from the Government, interest-free for the first five years. Borrowers, who have a 5pc deposit, then take out a mortgage to cover the remaining 75pc of the cost of the property.
The second phase – a mortgage guarantee – was made available to both first-time buyers and existing home owners buying newbuild and older properties. Again, borrowers need a 5pc deposit and the lender buys a guarantee from the Government covering up to 15pc of the value of the property. This makes it less risky for lenders to offer a mortgage to a borrower with only a 5pc deposit and enables them to offer cheaper rates.
Both phases are available on properties worth up to £600,000.
The scheme has certainly had an impact. Buyers, and particularly first-timers, are returning to the market, pushing up house prices. This, combined with record low interest rates and a shortage of properties on the market, has caused a marked rebound.
Threats to the market
But it’s not all good news. Critics of Help to Buy warn the scheme is artificially causing prices to rise and risks creating a house price bubble.
There are also concerns that when the Bank of England increases the base rate, which is likely to happen over the next two years, borrowers won’t be able to afford their repayments. With such little equity in the property, affordability could be a real concern for many households.
Lenders are also likely to hike their mortgage rates next year, given the recent announcement that they will not have access to cheap funding through the Funding for Lending scheme from January 1.
To add to the squeeze on borrowers, wages are not keeping pace with house price rises. A study by the Organisation for Economic Cooperation and Development found British house prices are 21pc over-priced against incomes.