For mortgages, the beginning of 2016 was characterised by another leg down in rates, as the competition between lenders that had marked the last quarter of 2015 continued. But the year also began with speculation over when the Bank of England (BoE) was likely to raise rates, especially in light of the US Federal Reserve’s decision to hike for the first time in seven years in December 2015.
BoE governor Mark Carney insisted the UK would not follow suit straight away, as the less-than-favourable global economic backdrop persisted.
However, with property values continuing to rise, affordability was and is the central issue for younger borrowers in particular. Having noted that homeownership was in decline in the UK, especially among the under 35s, former Chancellor George Osborne pledged to build more affordable homes.
His decision to back aspiring homeowners was made at the expense of landlords in the form of punitive tax changes for the buy-to-let sector. Some changes, such as the increase in stamp duty for properties bought as second homes and buy-to-let, kicked in last April, and there was a marked spike in property sales leading up to the deadline.
Buy-to-let was then put under further pressure when a Prudential Regulation Authority paper on underwriting standards suggested that some lenders were using weaker criteria for buy-to-let than for ordinary residential lending. It proposed a more prescriptive approach to affordability and stress tests for the sector.
Another notable event was the response to the launch of a self-cert lender in early 2016. The firm was quickly overwhelmed by applications from borrowers who felt their needs were not being met elsewhere. Its website crashed in the first two days of operation as 4,000 borrowers tried to apply, suggested that many have been trapped on their lenders’ expensive standard variable rates because they were unable to meet stricter new lending criteria.
Regulatory caution
Financial stability remained the watchword for the BoE, and it was the motivation behind many of its actions. For example, it feared buy-to-let investors could behave pro-cyclically, rushing to sell properties in the event of a rate rise, triggering a slump in the housing market and, ultimately, the banking system.
The debate about mortgage “prisoners” came to a controversial end as lenders’ ability to use transitional mortgage arrangements ended in March 2016 with the implementation of the Mortgage Credit Directive.
In May, the FCA used its Responsible Lending Review, designed to assess how the new rules affected lenders, borrowers and competition in the mortgage market, to endorse its implementation of the Mortgage Market Review.
Considering whether specific groups of borrowers were being denied access to affordable lending, the review concluded that there was no evidence that rules prevent creditworthy borrowers from obtaining affordable loans, or that they prevent firms from lending responsibly across specific groups, such as older borrowers and the self-employed.
It found that some lenders needed to be “more proactive and consistent in using exceptions to the responsible lending requirements for existing customers”. Other organisations disagreed; arguing that the findings appeared at odds with broker experience and underserved groups of borrowers included interest-only mortgagees, the retired, the self-employed and contract workers.
