Will the housing market avoid a slump?

Will the housing market avoid a slump?

When the Coronavirus hit, the housing market was forcibly brought to a halt. Now that restrictions are being lifted, it is starting to come back to life. This raises the question of whether it’s going to bounce back or whether there is going to be a housing market slump. This week’s Stamp Duty announcement will certainly play a large part in how the market develops.

Where now for the UK’s economy

Unless you can afford to pay cash for a property, your ability to buy one will depend on your ability to get a mortgage. If you want a mortgage, you will need to show your lender how you intend to repay it.

Unless you have a reliable income from sources other than work, this effectively means that your lender has to be happy that you have a decent chance of earning a living over the mortgage term. This starts with you having a decent chance of earning a living over the immediate future.

In short, therefore, the health of the UK’s housing market is likely to be closely tied to the overall health of the UK’s economy.

The economic impact of COVID19

On the one hand, it’s hard to describe the economic havoc wrought by COVID19. According to the Bank of England, the UK came close to insolvency. Some of the businesses which closed their doors to lockdown will never reopen them again. Admittedly, some of these closures might have happened regardless of the lockdown, but some of them might have survived.

It’s anyone’s guess how many more businesses will close and whether or not they would have survived if it hadn’t been for lockdown. Even if businesses do survive, they may be forced to cut back on their workforce. This will not necessarily mean redundancies. It could also mean steps such as cutting back on hiring, eliminating overtime or reducing hours for zero-hours workers or increasing the workload on in-house staff instead of hiring freelancers.

On the other hand, COVID19 has seen stories not just of businesses adapting to survive, but even succeeding in adverse circumstances. For example, according to research from Tamebay, UK SMEs actually increased their exports during the lockdown.

Non-essential businesses are starting to reopen and, where necessary, they are making adaptations to their business to ensure that staff and customers are protected from COVID19. Hopefully, these measures will not only prevent a resurgence of the virus but also serve as a form of protection against future pandemics.

Hopefully, therefore, the worst is now over and the UK can focus on moving down the path to economic recovery. If this is the case, then it is good news for the housing market.

The economic impact of Brexit

Only time will tell what impact Brexit will have on the UK’s economy. In this instance, however, businesses (and the public) have been given plenty of notice regarding the fact that it is going to happen (arguably four years worth of notice).

They also have at least some idea of the worst-case scenario, i.e. the UK leaves without a deal. This means that they have at least some opportunity to prepare for it, even if they are not happy about it. Hopefully, this means that any “transitional bumps” will be minor and short-term, at least in the general scale of the UK’s economy.

If this is the case, then the final arrival of Brexit may actually be a relief for the property market. Right now, people cannot know where Brexit will leave them. This means that they may not be confident committing to a major purchase, such as a new home. Getting clarity on what Brexit actually means in practice may put at least some people in a better position to make informed decisions on whether or not they are in a position to buy in the near future.

Your property may be repossessed if you do not keep up repayments on your mortgage.


COVID19 and the mortgage market

COVID19 and the mortgage market

The UK has been in some form of lockdown since 23rd March. It’s impossible to know for sure what impact that had on the spread of the Coronavirus. It is, however, very clear that it has had a significant impact on people’s finances. The challenge now is to transition back into “business as usual” while still supporting those who need a bit of extra help.

The economic impact of COVID19 (so far)

Over 10 million people have received financial assistance through the Coronavirus Job Retention Scheme (about 8 million) or Self-Employed Income Support Scheme. The CJRS was due to close at the end of July but has now been extended until the end of October. That said, the nature of the scheme is due to change slightly.

At present, the government is paying 80% of salaries up to £2500 per month and employers may (or may not) top this up to the full amount. Employers cannot ask furloughed employees to do any work for them, but employees can take second jobs and/or freelance. From August, employers will start to have to make contributions towards the scheme, but they can also start bringing employees back to work on a part-time basis. Alternatively, they could make them redundant.

Only time will tell, but, at present, it is impossible to rule out the possibility that the requiring employers to contribute directly to the furlough scheme (as opposed to indirectly through taxes) will lead to businesses reassessing their staffing needs and potentially deciding to cut back. This means that lenders may need to be prepared for more borrowers getting into difficulty, if only temporarily.

FCA measures to protect mortgage holders

Since March, both residential and buy-to-let mortgage-holders have been able to request mortgage holidays (provided that they were up-to-date with payments). Initially, these were for up to three months. In June, the FCA extended the respite period to the end of October.

Although payments are stopped, interest continues to accrue (unless the lender agrees to waive it which they are not obligated to do).

Provided that borrowers follow the correct procedure (i.e. agree the holiday with their lender rather than just cancelling payments), the payment break will be ignored by the credit-scoring agencies.

At the end of the holiday period, the borrower and the lender have to agree on a way forward. In particular, they need to establish whether the borrower can afford to go back on a standard repayment plan. If so, they need to determine how the borrower will make up the missed payments (e.g. by adding them to their regular payments or by extending the mortgage term). If not, they need to work out what potential solutions are available.

A cautious note of optimism

Although the post-Coronavirus environment could be a challenging one for lenders to navigate, it does not have to be a disaster. There are grounds for at least cautious optimism. For example, according to statistics from the Bank of England, during April, consumers paid back a record £7.4 billion in consumer credit and also increased deposits in banks and building societies by £37.3 billion.

The fact that people were able to make these payments shows that some people at least had some level of income over and above what they needed to cover their basic necessities.

There are still people in work and as more businesses reopen more people should be able to get back into earning money through active employment (as opposed to through support schemes). Even where jobs are lost, the employees in question may have savings and/or insurance to help tide them over. They may also receive redundancy payments to ease the transition.

Your property may be repossessed if you do not keep up repayments on your mortgage.

The FCA does not regulate some forms of buy to let mortgages.

 The FCA does not regulate letting agents and we act as introducers for them.


Is the mortgage time-bomb still ticking?

Is the mortgage time-bomb still ticking?

Back in 2013, the FCA identified three residential interest-only mortgage maturity peaks. The first peak was back in 2018 and there are two more predicted for 2027-2028 and 2032.  What’s more, interest-only mortgages are very much still available in the residential-mortgage market.  In fact, the number of residential interest-only mortgage products available almost doubled between 2013 and 2019.

This raises the question of whether or not the “mortgage timebomb” can be diffused over the next decade or so or if it could tick on for longer. Of course with recent events and the raised interest in this product, the question is now very important.

A brief explanation of interest-only mortgages

With an interest-only mortgage, the borrower makes interest repayments over the course of the term and then repays the capital at the end of the term.  On the one hand, this makes monthly repayments more affordable than they would be for a repayment mortgage for the same amount.  On the other hand, it means that interest is always charged on the amount originally borrowed, rather than over an amount which is continually decreasing.  It also means that the only equity borrowers build up in their home is via house-price inflation.

The challenge of paying back the principal


Mortgages, by definition, are secured loans.  Specifically, they are loans secured against your home, which means that your home is always at risk if you are unable to make repayments as you should.

With repayment mortgages, however, you are, again by definition, repaying some of the loan principal each month.  With interest-only mortgages, however, you have to find an alternative method of paying back the capital and the harsh reality is that even selling the property may not be enough to do so.

The issue of equity

As previously mentioned with an interest-only mortgage, the only equity you accumulated is through house-price inflation.  This means that you would only be able to repay the loan capital purely through the sale of your home if you achieved a net profit at least equal to the amount you originally borrowed.

While this is certainly not out of the question at all, it depends both on the state of the housing market at the time and on the tax regime in force.  For example, if the government does implement the suggestion of levying stamp duty on sellers rather than buyers, you would need to make enough profit to cover that.

Similar comments apply to using equity release.  Even though equity release products do not typically require the borrower to make any repayments during their lifetime (unless they move into permanent care), there is still an expectation that the loan will be repaid, with interest, after their death (or move into permanent care), hence the loan-to-value ratio has to make that feasible.

Alternative repayment vehicles

Of course, selling the property is not necessarily the only way to repay an interest-only mortgage.  You could use savings, investments or the proceeds from a pension pot, in fact, in theory you could use anything you wanted as long as it covered the cost.  The challenge is that in a low-interest-rate environment, returns on cash deposits are uninspiring.  It is, of course, possible for mortgage-holders to put their savings into higher-interest bonds, but the challenge would be to find bonds with high interest but low risks.

Similarly, investment returns are not guaranteed, which means that if the size of pension pot is dependent on investment returns, it is not guaranteed either.

The future of residential interest-only mortgages

In theory, the emphasis on affordability criteria, including having a realistic plan for paying back the loan principal, should protect both borrowers and lenders going forward.  In practice, only time will tell if this is the case or if interest-only mortgages really need to be relegated to financial history.


Your property may be repossessed if you do not keep up repayments on your mortgage.

Equity release refers to home reversion plans and lifetime mortgages. To understand the features and risks ask for a personalised illustration.

For equity release, savings, investment and pension products we act as introducer only



Understanding self-build mortgages

Understanding self-build mortgages

In the UK, the self-build mortgage market is still very niche.  This means that the selection of lenders and products is much more limited than it is for the standard residential mortgage market.  It is therefore highly advisable for anyone considering a self-build to learn about how lenders view the market so they can understand what is available to them and what lenders want to see in potential borrowers.

Self-build mortgages are riskier than residential mortgages

From a lending perspective, the worst-case scenario (which they must consider) is that a borrower defaults on their mortgage.  When this happens, the property on which the mortgage is secured will be sold and any proceeds will be given to the creditor (up to the remaining value of the loan).

With self-build mortgages, however, there may not be a property to sell, at least not a complete one.  This reduces the pool of potential buyers considerably and hence increases the lender’s risk.  Even when there is a property, there is a risk that the builder will not have completed it to acceptable standards, thus lowering both its value and the level of interest it will generate on the markets.  Buyers should, therefore, be prepared to address these concerns.

Self-build mortgages come in two main types – arrears and advance

The single biggest difference between a self-build mortgage and a standard residential mortgage is that with the former funds are released in line with development milestones whereas with the latter funds are released when you complete the purchase.  Self-build mortgages may or may not include the buying of the plot as a development milestone.

With arrears self-build mortgages, the borrower has to put up the capital to meet the milestone and then, when it is complete, the lender will release the funds to them.  In other words, using an arrears self-build mortgage minimizes the amount of working capital you need.  It does not eliminate the need for you to have your own funds.  Arrears self-build mortgages are the more common form of plan.

With advance self-build mortgages, by contrast, the funds are released before the milestones are met.  Remember, however, that these days it’s highly unusual to get any sort of mortgage at a 100% loan-to-vehicle rate.  With self-build mortgages, 75% to 80% is more likely.  This means that you will need some working capital of your own, albeit less than with an arrears self-build mortgage.

Self-build mortgages are generally more expensive than standard residential mortgages

You should expect to pay higher interest rates for a self-build mortgage than for a standard residential mortgage.  This is partly because of the increased level of risk and partly because of the reduced level of competition in the market.  You should also be prepared for arrangement/introduction fees.

As with all mortgages, you can expect your application to be scrutinized thoroughly.  In addition to convincing your lender that you are financially sound, you will also need to convince them that you know what you are doing with the proposed build.  Remember that in the residential mortgage market a lender can get a professional surveyor to give an opinion on a completed property.  They may also have data on the sales of comparable properties.  With self-build mortgages, however, they have far less information available to them.

Self-build mortgages can be converted to residential mortgages

Once a self-build property is complete, you have potential access to all the mortgages in the standard, residential market.  These can be much more competitively-priced, however, as always, you need to do your sums carefully before deciding whether or not to switch and, if so, when and to what.  Remember that there will be costs in moving from one mortgage-lender to another (plus administration) so you want to be sure that these are justified.

Your property may be repossessed if you do not keep up repayments on your mortgage.


We’re Borrowing How Much?

We’re Borrowing How Much?

The Wealth and Assets Survey of Great Britain is conducted by the Office for National Statistics (ONS) every two years.  The latest survey covers the period April 2016 to March 2018.  Here is a quick review of some of its key findings along with a guide to its limitations and its real-world implications.

Overall property debt in the UK is on the rise

According to the Wealth and Assets Survey, total property debt in the UK is now £1.16trn.  This figure is a 3% rise as compared to the last survey.  The number of households with property debt also increased from 9.1M to 9.2M (approximately 1%) and the median household property debt increased by five per cent to £96,000.

NB: In the context of the Wealth and Assets Survey, the term “property debt” covers both mortgages and equity release secured on properties.  This is technically accurate since the “lifetime mortgage” format of equity release is a debt secured against a property.  It can, however, be different from most forms of debt in that there may be no repayments required during the borrower’s lifetime.

Property debt is concentrated in the middle wealth bands

The Wealth and Assets Survey placed each of its respondents into one of ten wealth bands.  The top band comprised the wealthiest 10% of households while the bottom band was the poorest 10%.  The survey found that in deciles four to seven, 45% to 54% of households carried property debt, whereas only two per cent of households in the lowest decile had property debt.  The lower deciles were more likely to have financial debt (non-property-related debt).

Total financial debt rose by 11% or £12bn to £119B.  This was mostly due to hire purchase and student loans.  It should be noted, however, that student loan repayments are adjusted depending on income which makes them somewhat different to other forms of debt.  In principle, it also means that repayments should always be manageable even if an individual’s financial circumstances change.

Four per cent of households were identified as having problem debt, although, perhaps surprisingly, this figure does not include mortgages in arrears.

The limitations of the Wealth and Assets Survey

The Wealth and Assets Survey does not split out equity release from mortgages, nor does it split out different kinds of mortgages e.g. investment versus residential or repayment versus interest-only.  Likewise, the survey only expresses the amount of debt held by any given household.  It does not express this data in comparison to the value of the property.

Last but by no means least, this Wealth and Assets Survey is a survey of UK households.  It, therefore, does not include property debt held by companies as this is, by definition, not owned by a private individual even if they are the sole owner of the company in question.  This means that it does not capture data relating to buy-to-let investors who work through a limited company.

Full details on the Wealth and Assets Survey and its methodology are available on the ONS website.

The practicalities of mortgage debt

While the Wealth and Assets Survey provides an interesting snapshot of property debt in the UK, it does not give any great degree of insight as to what it means in practical terms for each household.  For example, although it collects data on property debt for each wealth band, it does not collect data on the percentage of a household’s income which is used to service the debt (which, in some cases may be none, since the survey counts equity release as property debt), or how much equity they have in the property.


Your property may be repossessed if you do not keep up repayments on your mortgage

For equity release products we act as introducers only. Equity release refers to home reversion plans and lifetime mortgages. To understand the features and risks ask for a personalised illustration.

The FCA does not regulate some forms of buy to let mortgages

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