Both struggling homeowners who need to remortgage and first-time buyers face a mortgage crunch this winter as loan rates rise and lenders continue to pull deals.
Mortgage rates have risen for the third consecutive month while the number of mortgage deals dropped for the fourth month in a row, with fewer than half of the deals available before lockdown still up for grabs.
Lenders are becoming more cautious about who they lend to, with some tightening their rules around who can qualify for a deal. They are also worried about what will happen to house prices.
Some one in four homeowners admit to being worried about renewing their mortgage
The Bank of England’s credit conditions survey of banks and building societies this week warned that it will become more difficult for prospective buyers to secure a mortgage as the year goes on, with first-time buyers in particular set to struggle.
Andrew Montlake at mortgage broker Coreco said that he is starting to see demand for mortgages drop off at higher loan-to-values, ‘as first time buyers with small deposits are increasingly aware that the chance of getting a mortgage agreed are somewhere between slim and zero’.
He added that there is increasing lender anxiety around economic conditions.
‘The expectation of higher default rates and stricter credit scoring criteria in the fourth quarter is also a sign of the direction the wind is blowing. In some cases lenders are already raising rates to stave off demand,’ he said.
Homeowners who took a mortgage holiday may also find it increasingly difficult to remortgage, with industry insiders telling This is Money that some lenders are now less willing to lend to this group.
Experts are now warning of a ‘ticking time bomb’ as a quarter of homeowners are worried about renewing their mortgage, and lenders can start repossessing homes again from next month.
Nearly a quarter of homeowners are worried about renewing their mortgage during the pandemic according to a poll – and a third said their income was less secure now than before the pandemic.
Homeowners who took a mortgage holiday may find it increasingly difficult to remortgage
Wesley Ranger of mortgage broker Willow Private Finance said: ‘This is a ticking time bomb waiting to explode. Millions of mortgage holders in Britain are up for renewal in the next 12 months with changed circumstances.
‘On top of all the other fears at the moment they are having sleepless nights worrying if they will be able to renew or even make their payments.
‘We are calling on the industry to show leniency for people with changed circumstances and for the government to extend its mortgage support scheme with urgency.’
The housing market is currently undergoing a mini-boom as buyers take advantage of the cut to stamp duty.
But experts are still concerned that this could soon end once the life support systems of furlough and mortgage holidays are switched off this month and the full effect of the virus on the economy takes hold.
Anthony Codling of property platform Twindig said: ‘It appears that house price rises and stamp duty holidays although helpful may not be able to prevent the UK housing market catching a cold this winter.’
Negative rates won’t rescue the mortgage market
Though experts think the prospect of negative interest rates is unlikely at the moment they are certainly on the table for the Bank of England as it tries to steer the economy through the crisis.
In theory negative interest rates would stimulate more spending by encouraging banks to get money out of the door to businesses and consumers to spend, rather than save.
It may also mean borrowing – for example taking out a mortgage – will become cheaper.
Central banks in Denmark and Switzerland have already set interest rates below zero, with Denmark’s third-largest lender Jyske Bank hitting the headlines last year after launching a mortgage with a rate of -0.5 per cent, the world’s cheapest.
This meant the amount a borrower owed the bank reduced each month because it deducted rather than charged interest. It wasn’t free money though, as the bank still profited from fees and charges.
There is also no guarantee that all banks would pass on the benefit in the same way, and lenders are usually slow to pass on interest rate cuts to borrowers.
The Bank’s base rate is not the only thing that affects the price of a mortgage, especially fixed rates. These make up the majority of mortgage deals, and unlike trackers, aren’t directly pegged to base rate movement.
The traditional influence on fixed rate mortgages over the past decade has been swap rates – the cost of obtaining fixed term funding on the money markets for lenders.
Mortgage lenders’ confidence and access to funding are equally important to rates.
Mortgage holders already on variable rates should for the most part start saving money every time interest rates are cut.