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Post-election mortgages - Jonathan Cornell

Post-election mortgages

There has been plenty of rhetoric in the media about the costs of mortgages rising depending on which party you voted for. The Conservatives in particular have suggested that a hung Parliament may lead to more expensive mortgages. The argument behind this is that if there is a hung Parliament then investors would be more nervous about the UK’s ability to reduce its crippling level of debt, so they would want a high interest rate on any debt issued by the UK Government to compensate for the higher risk, in turn this would end up being passed onto borrowers in the form of higher interest rates.

In what is quite a frank statement for a politician Ken Clarke pointed out that “Anybody buying a house now must realise the rates are unnaturally low and will go up in future years.” Mr Clarke warned borrowers: “In working out whether you can afford a house, you have to work out if you can afford a quite perceptible increase in interest rates, regardless of who the government is.” Few people would disagree with him. There are a number of factors affecting the costs of how much mortgages cost. On one hand you have record low interest rates, the UK base rate has been at 0.5% for more than a year, on the other hand, the supply of lending and thus lending has plummeted in recent years. Lenders will point out they don’t borrow at the base rate, in the past they were able to sell on parcels of mortgages to investors which substantially increased the supply of mortgage funding but the credit crunch destroyed most investors desire to buy pools of mortgages, so the vast majority of funding is coming from savers. Again savings rates aren’t directly linked to the base rate but they will be correlated, so when the base rate goes down they go down but as lenders need savers to fund mortgages some savings rates have gone up. Lenders will always want to charge borrowers more than savers so mortgage rates aren’t really as low as you would expect. Lenders have tended to offer the lowest rates to those borrowers with substantial deposits, borrowers with small deposits now pay more for their deals now compared with when the base rate was 4 or 5% higher.

One aspect looming on the horizon is the expiring of certain government schemes supporting mortgage lending. The trade body for mortgage lenders, The Council of Mortgage Lenders has suggested that there may be a £300bn funding gap – the difference between what property buyers wanted to borrow and the funds available to lenders – would open up when existing government support schemes expired in 2014. At the moment that that gap has been filled temporarily by government funds through the special liquidity scheme and the credit guarantee scheme. However by 2014, however, both of these schemes will have expired. Some of this gap will be taken up in the form of securitisation as confidence is slowly returning to this as the economy and the housing markets heal but that’s still a lot of money to find from savers. If you couple this with the fact that the base rate will go up eventually once the economy grows enough. Then it doesn’t take a genius to work out that mortgages are going to be more expensive the only question is how much more expensive.

Jonathan Cornell

Jonathan has been involved in the financial services industry for more than 15 years. He is current working a number of freelance projects, including working part time for First Action Finance as Head of Communications. He has a BA in Economics and an MBA. Jonathan lives in Guildford, Surrey is married and has a one year old son.

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