Mortgage market outlook for 2016
The interest rate outlook will remain stable
An interest rate hike is likely to be held off for most if not all for of 2016. If a rate hike were to be introduced, it is likely to be by small increases towards the later part of the year. The US Federal Reserve has tested the water with a minimal increase of its base rate by 0.25% which is what we can expect rates to be increased by here in the UK. Further increments are likely be gradual and of a similar level. It is worth noting that the US base rate is now 0.5%, up from 0.25%, whereas the UK has supported a 0.5% base rate since 2009.
The UK economy has only recently seen inflation return to a positive level from a four-month negative trend. The Bank of England has voiced reluctance at increasing the UK base rate until their inflation target of 2% is met.
Fixed rate deals continue to present excellent value for money in the current market although we would strongly recommend that all borrowers review their mortgage strategies in the first half of this year so as not to miss out on what will have been some of the best mortgage deals we have ever seen or are likely to see again. The increase in rates in the US mean a probable increase in global swap rates which underpin the cost of fixed rate mortgages.
Buy to let stamp duty hike will not be as bad as it seems
Following the announcement of a planned stamp duty hike on buy to let property (to be introduced from April 2016), we are urging clients not to panic as our outlook for the sector remains positive in spite of these changes. Our latest research indicates that even with the 3% increase in stamp duty and gradual reduction of higher rate mortgage relief, the likely returns from buy to let property are still enough to deliver satisfactory yields to investors when compared to alternative investments. Recent research by RICS identifies that over the longer term rents could rise by an average of 5% each year for the next five years and house prices could rise by 4.7% a year. This will help absorb the higher purchase and running costs of a buy to let investment.
The biggest drag on the buy to let sector will be the adjustments that lenders are making to their criteria and lower yields, both of which impact on borrowing limits. Being able to achieve a 60% loan to value where capital gain is the objective will be an achievement with closer to 50% being the norm.
We do expect the corporate structure to emerge as a more mainstream method by which investors will participate in the buy to let sector. Lenders are likely to offer a range of products specifically targeting this development.
The European Mortgage Credit Directive (EMCD) will make for a busy start to the year and there will be unintended consequences
It is our view that most lenders are now generally EMCD ready, perhaps as a result of having to make significant changes to their systems following 2014’s Mortgage Market Review (MMR).
We have seen a few lenders halting any lending to expatriates, others have amended their lending criteria to discount the use of non-sterling income. This will be to the detriment of those borrowers employed by any foreign based firm in the UK. Such firms typically pay bonuses in Euros or Dollars which the lender will now have to exclude.
The directive will reduce the number of foreign buyers/investors as they will find it increasingly difficult to raise mortgage finance.
We believe that a few lenders will identify the opportunities created by the EMCD changes, by assisting mortgage borrowers who will be turned away by the vast majority of lenders who do not wish to invest in the infrastructure required to comply with the new regulations.