The reign of the sub-1% base rate is over – for now at least.
We have enjoyed an interest rate of 1% or below for the best part of thirteen years and for newcomers into the market – both borrowers and advisers – we are in unchartered territory.
A Bank Base Rate of 1.25% is the highest since 2009 and marks the fifth increase since December. While it is important not to downplay the impact rising rates and the cost of living will have on some borrowers’ finances – the news interest rates are rising is no great shock.
What goes down must come up in the case of interest rates and this is something the industry has been bracing itself for over the last few years. Those who have been active in the market for some time – like me – will remember the days when anything below 5% was viewed as incredibly positive.
The changes brought about by the Mortgage Market Review in 2014 have for the most part done what they intended to do and created a resilient market, ready to withstand economic headwinds.
For one, the stress test introduced by the Financial Policy Committee (FPC) has ensured borrowers can afford their mortgage payments should they rise 3% above their lender’s SVR – allowing for plenty of lee-way when it comes to rising rates.
This, coupled with the cap on the number of mortgages that can be extended at loan-to-income (LTI) ratios at or above 4.5% means we are in a very different place to say 2009. We are also no longer a market with a surfeit of interest-only mortgages, 100% -plus LTVs and self-certification loans.
June’s mortgage lending statistics from the FCA show loans advanced to borrowers with an LTV over 90% stood at just 3.9% in Q1 2022, with just 0.2% of these over 95% LTV. Loans between 75-90% LTV made up 31.6% of new lending and 75% LTV or less, 64.5%. This compares to 5.62% of all loans over 95% LTV in Q1 2007.
Since 2007 lending over 95% LTV has shrunk considerably. While not good news for first-time-buyers, it does indicate the majority of borrowers are not at their LTV limit – especially when we factor in rising house prices. It is a similar picture for borrowers with a high LTI ratio.
A high LTI is classed as a single income with an LTI ratio of 4 or above, or a joint income of three or above. The latest FCA figures show us new lending to borrowers on a high LTI represented under half of new lending in Q1 this year at 49.7%, with the majority of other lending made up of ‘low’ LTIs.
This has remained the case for the last decade. If anything, higher LTI lending is slightly up today to where it was ten years ago. If we go back to Q1 2012, lending to borrowers classed as high LTI made up just 34.56% of new lending, suggesting those mortgages over the last decade have been comfortably affordable.
While the interest and mortgage product rates are going up, we should also keep in mind they have been at historic lows. Gross advances with interest rates less than 2% above bank rate made up 85.5% of lending in Q1 – the highest since 2008 Q3. The share of advances with interest rates between 2% and 3% above bank rate was 9.8% and only 4.7% at 3% and over. What is more, the proportion of total loan balances with arrears is at its lowest since the FCA’s record began at just 0.82%.
Rising rates are understandably unnerving, but we are approaching this new chapter in the market from a pretty good position and the foundations that were put in place as a result of the Credit Crunch, do provide us with a stronger market and a more resilient borrower cohort.
This is undoubtedly positive, especially as it looks increasingly likely that further rate increases are inevitable, especially as the Bank of England seeks to do something to curb inflation.
Simon Jackson is chief executive officer of MSS
