Private Finance's Weekly Mortgage Memo - 7th June 2021
This is our take on what is currently happening in the mortgage market. Our views are often cited in several national publications, including; BBC News, The Times, Telegraph, City AM, FT Adviser and Daily Mail, as well as a number of key trade publications, so this should keep you ahead of the curve. If you have any questions on any of these stories, or would like further information, please do not hesitate to get in touch.
- The growth in interest only mortgages
- Borrowers extending themselves to secure forever homes
- Buyers and borrowers moving even further afield
The growth in interest only mortgages
We have been seeing a significant rise in interest and demand for interest only mortgage products in 2021. While these types of products are usually only available to wealthier borrowers, with high levels of equity or cash/investments in the background, they make purchases incredibly affordable. Many prefer the certainty of a repayment mortgages but the majority of interest only mortgages still enable borrowers to repay the capital in up to 10% chunks per annum without fee. Interest only is particularly useful for those who have relatively smaller basic incomes, but large bonus/commission packages or seasonal / variable incomes. This growth is likely due to the fact it is a useful form of borrowing for those who want to purchase a second home or holiday home, as it reduces their expenses considerably – for instance you could pay £1,000 a month borrowing £750,000 on a £1.5m country house given the low rates of interest available, in comparison to say £3,600 per month on a repayment basis over a 20-year term.
- While interest only products could appear a riskier choice, lenders have strict affordability assessments so they can be assured even if the debt increases to a stressed interest rate (say 7% for example) that the mortgage would still be affordable, obviously a sacrifice of luxuries may need to be made if this was the case.
- This demand could be partly due to inflationary fears, with this option meaning clients can protect themselves from higher payments if interest rates do rise and will make their own arrangements to paying down the mortgages. Moreover, it gives borrowers the opportunity to free up more capital which they can use in investments and the like and given the low interest rates; the potential returns will likely outperform the amount they need to repay.
Borrowers extending themselves to secure forever homes
We are seeing an increasing number of buyers extend themselves in order to secure bigger properties, that they would otherwise have waited a few more years before purchasing. Effectively, buyers are leapfrogging steps in the usual climb up the housing ladder and can this, partly due to the fact an increasing number of people have been freed from the geographic shackles of the commute (see below) and due to the low interest rate environment. For instance, clients who in the past would have been more conservative, regardless of the fact more was affordable are significantly increasing their borrowing to secure a long-term home that ticks all their boxes; one recent client was looking around the £750k mark initially but came back to us looking at £1.5m after failing to find anything they deemed suitable. Another who is living in a £400k one-bed flat is skipping the usual second step to a £700/800k property and looking to buy a large house at around the £1.2m mark.
- This level of borrowing is of course only available to those with the income to match, but with interest rates at rock bottom the repayments are relatively low, and lenders are consistently relaxing other aspects of lending criteria, including bonus income and the like, making borrowing at this level more affordable.
- It will be interesting to see whether this is a reactionary trend and is relatively short term or marks a paradigm shift in peoples outlook for property… perhaps a shift given the extreme costs in moving home each time, some of the stamp duty bills we see are eyewatering.
Buyers and borrowers moving even further afield
We are seeing an increasing number of clients moving even further afield than was previously the usual for those looking to upsize and leave city behind. We have seen this trend extend to first-time buyers too, as well as second steppers as outlined above. Pre-Covid, the norm would be for borrowers who were located for work in London and the South-East to make the move to the Home Counties or those areas in commutable distant from London in the search for more space, however with commuting dramatically reduced, we are helping an increasing number buy in places like rural Devon, Norfolk and Cumbria
- It is partly this reason that prices are rising fastest in areas like the North-West. Not only did these areas have a lower starting point in terms of price, but they are also seeing huge amounts of new demand.
- In order to secure larger “forever homes” that owners can grow into, they are being forced to look to places that are further afield in order to be able to afford what they are looking for and thus this demand is in part driven by first-time buyers and second steppers moving away from one and two-bedroom city centre properties to larger homes.