Maintaining mortgage affordability in 2015

Alexander Burgess

December 10, 2014

Alexander Burgess is a director at British Money

According to the Council of Mortgage Lenders there are 11.1 million mortgages in the UK with loans totalling over £1.2 trillion.

In its recent gross mortgage lending announcement, the CML reported lending levels reached £19 bn in October 2014, the highest for this month since 2008.

It also predicted market activity would gain traction in the New Year, referring to positive forecasts for growth, pay and unemployment.

In its September report ‘A Housing Market To Be Proud Of’ the CML confirmed 2013 saw, for the first time in five years, over one million home purchases.

Total lending was some 20% up on 2012 at £176bn and it is expected to reach £210bn by the end of 2014.

The European Commission paints an equally positive picture having revised the UK’s 2015 growth forecast to 2.7%.  In 2016 it is set at 2.5%.

Increased confidence in the economy is leading to greater confidence in the housing market.  Based upon the CML’s 2013 mortgage statistics and future predictions, the potential target market for InterestGuard is the 11.1 million or so existing mortgage holders plus over one million new home purchases year upon year.

A typical customer, as profiled by the Office for National Statistics in August 2014, paid an average of £272,000 for their house in the UK.  CML data (September) suggests the average mortgage is around £154,800.

There’s a generation of house buyers who have only ever experienced low interest rates, so when they do rise – the financial markets anticipate bank rates will be at 2.28% by August 2017 –  one in four, according to a YouGov survey, will find it difficult to cope.

Still reeling from the financial and reputational consequences of the Payment Protection Insurance mis-selling scandal, lenders, insurers, brokers and other intermediaries have no desire to design and market new insurance products or even offer existing cover from within their portfolio.  With consumers sceptical of such policies it’s no surprise to find FT Adviser reporting a dramatic slow-down in sales.

There are only three million protection policies in the UK and 30 million working people; this equates to 90% of workers without any form of financial support mechanism.

This ever-growing protection gap is well documented in the Association of British Insurer’s paper ‘Welfare Reform For The 21st Century’ where it warns ‘the model of State provision is not economically viable for the future’.

There is a need for borrowers to be given a financial safety net when their circumstances change – the same sentiment applies to those facing a mortgage rate change.  Home owners’ have no protection against an increase in their household expenditure. There’s plenty of rhetoric over the impact such a rise will have, but the financial services sector is not offering any tangible solutions other than to ‘re-engage with borrowers’.

This view is shared by the CML.  In its Housing Market Report, it concedes ‘borrowers will at some stage need to adjust to higher costs … a return to normal interest rates will mean an increasing number of home owners may experience mortgage repayment difficulties.  The Government needs to develop an additional safety net, perhaps combining private insurance and State support in a more joined-up way than under current arrangements’.

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