Overall mortgage lending dipped slightly near the end of 2014 and into 2015, but strong growth in the housing sector resulted in a healthy rebound in 2015. Now it appears that the demand for mortgage lending will continue to be solid for the next several quarters. Furthermore, the future of interest rates and new rules affecting buy-to-let purchasers will have a definite impact on the mortgage market through 2016. Indeed, they are already affecting UK mortgages both positively and negatively.
For the record, mortgage lending surged in the second half of 2015 on news that the Bank of England would probably not raise the base rate until sometime in 2017. Total gross lending increased by more than 29% through the end of last year (2015).
Since the start of the housing crash, the base rate set by the Bank of England has been a mere 0.5%. Combined with a generous Funding for Lending scheme that lasted some 18 months, the low base rate enabled banks to lend more money to both first time and repeat homebuyers for several years beginning in 2009. Consumers benefited from less expensive loans and lower value repayments. That trend has continued virtually unabated ever since.
Mortgage lending did slow down toward the end of 2014 due to fears of a pending rate increase. For good or bad, financial experts began predicting in late 2013 that a base rate increase was just months away. Those predictions continued every quarter through mid-2015 when the US Federal Reserve finally made the move to increase that country's prime lending rate. The Bank of England was expected to follow, but it chose not to.
Fears of increased rates kept homebuyers at bay until it became evident that the base rate was not going to rise. When the truth finally came out, buyers began running to lenders looking for new mortgages. This sparked an interest rate war among banks spearheaded by HSBC, leading to rates as low as 1.6% for mortgages with a 75% LTV ratio.
With rates remaining low and competition still high, the mortgage market is strong for consumers looking to buy primary residences. Even buy-to-let purchasers got in on the action until the start of 2016. However, the buy-to-let market is about to take a significant hit. How hard that hit will be remains to be seen.
Until the start of 2016, the buy-to-let market had been the strongest segment of mortgage lending for several quarters in a row. Banks were falling all over themselves to lend to landlords looking to purchase their first properties or expand their portfolios. Then the government stepped in. We expect buy-to-let mortgages to fall off as a result.
Two new rules are particularly troubling to property investors. First is the increase in stamp duty that took effect early in 2016. Any home purchased as a second property, for whatever reason, is subject to standard duty at least 3% higher than what was previously collected. For landlords, this could mean paying thousands of pounds more than they otherwise would have to acquire new properties. This will undoubtedly be a damper that could slow the growth of buy-to-let investing.
The other rule change could be potentially more devastating but will not come into effect until next year. It is a change that eliminates the mortgage interest deduction landlords have typically enjoyed. Because the money paid in mortgage interest will be subject to income tax beginning in 2017, profits will plunge. We expect this to have a further dampening effect on the segment.
Current trends indicate that mortgage lending is a mixed bag. It appears to be positive for consumers purchasing primary residences; things appear negative for property investors and individuals looking to purchase second homes as holiday properties.
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