Mortgage borrowing still above pre-pandemic levels but rising rates and tighter criteria set to dampen lending
Net borrowing of mortgage debt by individuals increased to £7.0bn in March, up from £4.6bn in February, data from the Bank of England revealed today. That is well above the pre-pandemic average of £4.3bn in the 12 months up to February 2020. Gross lending rose slightly to £26.5bn in March from £26.0 billion in February, while gross repayments fell to £19.7bn in March from £21.0bn in February.
Adrian Lowery, financial analyst at investing platform Bestinvest, says that recent monthly mortgage lending data has been extremely volatile. But as can be seen from the BoE’s graph in the release, lending is still well above pre-pandemic levels, as average UK property prices have been steadily increasing – while house purchase numbers are fairly steady around the 71,000-a-month mark (compared to a pre-pandemic 12-month average of 66,700).
‘As house prices stabilise and lenders tighten their mortgage availability criteria in the coming months, the trend is likely to return closer to levels seen before the pandemic disrupted the property market in a quite unpredictable manner.
‘A detail in the release reveals that the “effective” interest rate – the actual interest rate paid – on newly drawn mortgages increased by 14 basis points to 1.73% in March, while the rate on the outstanding stock of mortgages ticked up 2 basis points to 2.04%. Confirming that homebuyers and remortgagers are facing higher loan rates – as well as stricter borrowing rules.
‘The Bank of England’s quarterly credit conditions survey last month noted that lenders expect loan defaults to rise over the coming months and also plan to rein in mortgage lending by the greatest amount since the early days of the Covid-19 pandemic. That report showed lenders expect more defaults on mortgages (as well as unsecured consumer lending and business loans) in the three months to the end of this month.
‘Despite this the bank has suggested it could dilute a required stress test that states borrowers must be able to afford a three percentage point increase in their mortgage rate. The new stipulation will be 1.5 percentage points. That might seem a contrary move given the expected upwards path for interest and mortgage rates in the medium-term.
‘Two of the UK’s biggest mortgage lenders have tightened their criteria for borrowers seeking larger loans. HSBC now requires those who apply for a mortgage at 4.75 times their annual income to earn at least £50,000 a year, up from £40,000. Those who earn less will be limited to a maximum of 4.49 times their income – a typical limit on home loan size.
‘Nationwide meanwhile has increased the minimum salary required to apply for its “Helping Hand” mortgage range, which offers loans at up to five-and-a-half times income. Single applicants now need to earn £37,000 (up from £31,000) and couples need to earn £55,000 (up from £50,000).
‘But, especially in the current climate of rising costs across the board, homebuyers and remortgagers should be careful not to overstretch themselves, even if a broker or lender can arrange it. A good rule of thumb is that no more than a third of total household post-tax income should be taken up by housing costs, whether that is rent or mortgage payments.’