Funding for Lending boosts UK’s mortgage market

Weakness in the UK’s mortgage market could be coming to an end with the new figures published today by the Council of Mortgage Lenders showing lending is 4% higher than a year ago.

The CML’s forward estimate is that total gross mortgage lending recovered to £12.9 billion in October, a reversal of the sharp dip reported for September.

House purchase and remortgage activity are both likely to have picked up in October, in keeping with the underlying improvement in Bank of England approvals data over recent months.

‘Special factors have distorted the monthly pattern of house purchase activity, but the underlying picture appears to have settled into a pattern of modest year on year growth,’ said CML chief economist Bob Pannell.

By contrast, remortgage activity had been very subdued through 2012, with low back book rates limiting incentives to refinance onto new deals. However, over recent months the cumulative effect of increases in SVRs by some mortgage firms and more competitive mortgage deals, on the back of better funding conditions, appears to have re-kindled some remortgaging appetite.

‘While this is from a low base, the Bank of England reported 28,000 remortgage approvals in September, it does suggest that remortgage activity may act as less of a drag on overall lending going forwards,’ explained Pannell.

He pointed out that an important development for the market is that the upward pressure on new mortgage rates, evident during the first half of the year, has shown signs of abating in recent months.

‘House purchase and remortgage activity both appear to have picked up recently, and this should be supported by an improvement in the availability and pricing of mortgages. The Funding for Lending Scheme (FLS) is likely to have made an early positive impact, helping to counter some of the negative pressures associated with a protracted and weak economic recovery,’ he added.

Richard Sexton, director of e.surv chartered surveyors, believes that the change is largely down to FLS, which has encouraged banks to increase lending. ‘FLS has created a cacophony of debate, but it looks like we’re finally seeing it boost lending by supporting banks’ balance sheets with cheaper funds,’ he said.

‘The scheme has been aided and abetted by wider improvements in the economy, particularly to the labour market, but it’s unlikely to be enough to offset chronic ailments buried deep beneath the skin of the mortgage market, longer term. Banks’ are still required to put aside high capital ratios, which leaches funds away that could be used to increase first time buyer lending, traditionally the engine room of the property market. And anaemic economic growth will act as a real drag on lending volumes, potentially for years to come. These broader underlying problems are likely to keep the mortgage market anchored at the subdued levels we’ve been accustomed to seeing post 2008,’ he added.

According to David Whittaker, managing director of Mortgages for Business, the mortgage market is taking steps in the right direction and the FLS is helping ease some of the squeeze on banks’ mortgage funds, but it’s certainly not a magic cure for the mortgage market.

‘Funding for Lending is focussing more on low LTV borrowers than first time buyers, and so is acting more like a walking stick for someone with a dodgy knee, that is helpful in the short-term, but take it away and the patient will struggle to walk,’ he said.

He pointed out that if the owner occupier market is to start moving freely again, lenders’ need to significantly increase their high LTV lending and he does not think that is imminent.

‘It’s good news for buy to let investors though, a combination of low property prices and high rents has pushed gross yields up over the last 12 months. As a result buy to let activity is likely to remain high for the foreseeable future given the high returns on offer across a range of different property types,’ he added.

Lenders are still relatively risk shy as the market continues to reposition itself, said Mark Blackwell, managing director of xit2, the survey, valuation and asset management data exchange specialists. ‘It’s not time to get out the bunting just yet. The Funding for Lending Scheme has bolstered lenders’ balance sheets with cheaper funds, which has been the catalyst behind the improvement in lending over the last two months. But it’s mainly to low LTV borrowers, rather than the traditional beating heart of the property market, namely first time buyers,’ he explained.

‘Gross lending is still only 43% of its pre-2008 peak while the mortgage market has retained some of its post-crisis weaknesses like stringent capital requirements, tight funding conditions in the money markets, and a chronic lack of confidence. Rises in standard variable rates are on the horizon, after low interest rates themselves have been relatively impotent in helping stimulate growth. Interest rates and inflation can’t stay low for long, while any sustained improvement in the jobs market will require a sustained period of economic growth, which looks some way off yet,’ he added.

Nick Hopkinson, director of property company, PPR Estates, believes that while house prices are still on a downward trajectory more lending is unlikely. ‘House prices continue to drift downwards, according to even the most optimistic estate agent surveys this month, outside the millionaire London enclaves. Inflation is remorselessly squeezing household budgets with austerity and falling take home pay, in real terms, putting many homes even further into debt as we end 2012. Sales activity in the housing market remains stuck at half the pre-credit crunch levels seen in a functioning market. Most buyers are either unable or unwilling to take on mortgage debts at the levels on offer due to lack of confidence or sufficient funds for deposits,’ he pointed out.

‘Despite over three years of the lowest official lending rates in history many owners are stuck in a negative equity nightmare that will not go away. Prominent experts estimate that over one million UK home owners are effectively now mortgage prisoners in their own houses having seen prices drop below their debt levels.

‘Against this backdrop, house prices will almost certainly fall further in the coming months and it seems highly irresponsible for lenders to be pushing high loan to value mortgages under the disguise of a government initiative for over priced new homes,’ he added.

Hopkinson does not believe that Funding for lending is a sensible solution to the housing and mortgage markets’ problems. ‘The big banks and developers should be pricing their products more realistically, rather than enticing unsuspecting consumers into more financial difficulties. We can only hope that this doesn’t become the next banking scandal,’ he said.

Meanwhile, Brian Murphy, head of lending at the Mortgage Advice Bureau, disagrees. ‘Funding for Leading appears to be benefitting borrowers, with access to cheaper funding prompting lenders into cuts which meant average mortgage rates fell across the board.  Having just seen the busiest month for mortgage applications since before the financial crisis, we can expect to see another healthy set of lending figures next month,’ he said.

And Paul Hunt, managing director of Phoebus Software , is positive about the outlook. ‘Although the economy is relatively flat, gross lending is on an upward curve that looks set to become even more positive as we approach Christmas. The Funding for Lending scheme is offsetting some of the side effects associated with the sluggish economic recovery. The willingness of lenders is of central importance in boosting activity,’ he said.

‘Lenders are becoming more competitive and jostling for market share, hence why we’re seeing more products coming onto the market, and at higher LTVs. Now that lenders have been given the incentive to increase mortgage finance, by an improvement in the availability and pricing of mortgages, this should lead to cheaper rates which will cater to the needs of first time buyers and provide them with a wider choice of finance,’ he added.