2013 was the year the first time buyer bounced back, with a surge in availability of affordable mortgages for those with low deposits spurred on by government support. However, as the Funding for Lending Scheme for homebuyers is withdrawn and fears of an interest rate rise grow, how is 2014 shaping up for first time buyers? >>
2013 saw the first time buyer bounce back. Funding for Lending began to take effect and encouraged banks to lend to ftbs. Help to Buy 1 was introduced in England, Scotland and Wales, and Help to Buy 2 was announced across the whole of the UK including Northern Ireland. This all conspired to boost the availability of affordable mortgages and made 2013 a lucky year for ftbs.
The result? A boom in property sales – by November 2013 transactions hit the one million mark – the first time since 2007. However, as the market bounced back, commentators increasingly warned that market stimulation was leading to a bubble. Lack of housing supply combined with high demand for properties drove up house price growth to a level not seen since the boom of 2007 and a surge in property values across the country. This was particularly acute in and around London where official figures in autumn 2013 showed that the average cost of a London home hit a new all-time high of £390,720.
In late 2013, the government announced some key measures as a response to the steadily heating housing market. In its December Autumn Statement the government said it was withdrawing the Funding for Lending Scheme for homebuyers on the basis that this stimulation was unnecessary any longer. The original scheme had achieved its objective – to encourage banks to start lending to home buyers again. Furthermore, in November 2013 the Bank of England warned of possible interest rate rises in 2014. The government also pledged £1 billion-worth of loans to unlock large housing developments and to increase local authorities’ housing revenue account borrowing limits in order to stimulate house building.
So what will these changes to housing policy introduced or announced in late 2013 mean for ftbs?
REMOVAL OF FLS FOR RESIDENTIAL PROPERTIES
The Funding for Lending Scheme (FLS) was launched on 13 July 2012 by the Bank of England with government support. It was designed to incentivise banks and building societies to boost their lending to businesses and consumers by allowing lenders to borrow from the Bank of England at cheaper than market rates for up to four years.
In November 2013, it was announced that as from 2014 the FLS scheme would refocus lending to small and medium sized enterprises (SMEs) in 2014 rather than homebuyers. Chancellor George Osborne said at the time of the announcement: “Funding for Lending proved a successful tool in supporting the recovery. Now that the housing market is starting to pick up, it’s right that we focus the scheme’s firepower on to small businesses.”
Though the removal of the Funding for Lending Scheme support for residential properties sounds drastic, most commentators believe it had done its job – to kick-start lending to consumers who needed high loan-to-value (LTV) mortgages. In November 2013, when transactions hit the highest levels since 2007, it was clear that the housing market recovery was well underway and this government scheme was no longer necessary.
Council For Mortgage Lenders director general Paul Smee says: “Although the changes to the FLS may be a surprise, they are not a shock. Mortgage lenders are well equipped to meet their funding needs, as wholesale funding market conditions have improved and retail deposits are robust.”
Some experts, however, are warning this will inevitably mean a rise in mortgage rates. Andrew Montlake, of mortgage broker Coreco, says: “While it may not have a massively profound effect on mortgage rates initially, it does look like the beginning of the end for historically low rates.”
Interest rates have been at a historical low of 0.5% since March 2009. Due to a wavering economy/housing market, the Bank of England have held firm and not budged on this rate since.
However, in November 2013 the fi rst signs of a change on the horizon came after Paul Fisher, who sits on the Bank of England’s Monetary Policy Committee, said that interest rates could go up to 4-5% as early as next year. But the Bank of England has also emphasised it will deliver a “proportionate and graduated” response to risks that might emerge from the housing market, suggesting it does not intend to hike interest rates significantly and rapidly in the short term.
The Bank of England’s monetary policy committee stated that interest rate rises would only be triggered if unemployment fell to 7%, adding that this was not estimated to happen until
the autumn of 2016. Some economists, however, think the unemployment rate could drop to this figure much more quickly, thereby triggering an earlier interest rate hike. Though in December 2013 the Governor of the Bank of England, Mark Carney, tried to reassure the public by saying it was unlikely that interest rates would return to historically normal levels any time soon. What he means by ‘soon’, of course, is up for debate.
The result of this renewed discussion around interest rate increases is encouraging more ftbs to take out fixed rate mortgages in order to insulate themselves from future interest rate rises.
Now that mortgage availability has increased, the focus has very much switched to housing supply. Figures suggest the number of households is forecast to grow by 232,000 per year until 2033, and yet the current rate of home construction is struggling to increase above 100,000 a year. The amount of house building in the UK needs to accelerate if we are going to get anywhere close to meeting demand.
In the government’s Autumn Statement in December 2013 some key policies were announced to tackle the housing shortage, and many commentators have welcomed this approach. James Poynor, Managing Director of Countrywide Land & New Homes, the UK’s largest new homes agency, says: “£1 billion of government investment to stimulate supply and unblock key development sites around the country will be welcome news to housebuilders, as well as the continued regeneration of sites and ongoing reforms to planning measures to get the UK building sustainably again.”
But some industry leaders believe government policy will only go some way to tackling the acute lack of housing supply. Simon Rubinsohn, Chief Economist for the Royal Institution of Chartered Surveyors, says: “The £1 billion of loans to unblock housing development across the country will contribute towards housing need and will drive construction jobs. However, we still believe housing is not at the centre of a coordinated property-led growth that supports a balanced regional recovery where all can access the market.”
CURRENT FIXED RATE DEALS
|» Norwich & Peterborough Building Society offers a good package for 2 and 5 years, fixed for 2 years at 1.99% to 65% LTV with a £295 fee, free valuation and £200 cashback for purchase; the 5-year rate is 2.84% with all other details the same. nandp.co.uk|
|» For those with smaller deposits, Skipton Building Society offers a 2-year fi xed at 3.99% to 90% LTV with no fee and a £160 cashback. skipton.co.uk|
|» Post Office offers a 5-year rate as low as 4.29% to 90% LTV, although it does carry a £1,495 fee. postoffice.co.uk/mortgages|