SIMON LAMBERT: Stamp duty's been cut and the mortgage crunch has eased slightly but the real challenge for house prices is still to come
By SIMON LAMBERT FOR THISISMONEY.CO.UK
The mortgage crunch for homebuyers with small deposits is easing, but the return of more home loans comes at a cost.
After the Chancellor’s stamp duty holiday gave the property market a boost last week, Nationwide stepped back into the 10 per cent deposit mortgage market.
Britain’s biggest building society was joined to some extent by Coventry BS and Co-op Bank, through their arms that deal with mortgage brokers.
But Nationwide has also revealed that its 90 per cent mortgages will return at a higher rate and it will be raising rates on 85 per cent mortgages too - with two-year fixes rising by up to 0.3 per cent and five-year fixes rising by up to 0.45 per cent.
In the Office of Budget Responsibility's downside scenario house prices fall almost 15% over two years, but in its upside scenario the housing market suffers a small blip and gets back on track - will the slight return of 90% mortgages and a stamp duty cut be enough for the former?
At the start of March, Nationwide had a 90 per cent first-time buyer mortgage at 1.84 per cent - now its new deals for those with a 10 per cent deposit start at 2.49 per cent.
That's still an astonishingly low mortgage rate by historic standards, but with many borrowers already needing to stretch as far as they can to get on the property ladder - taking on mortgages with 35 or even 40 year terms - that bumping up of rates will affect affordability calculations and hamper their chances.
It’s clear that the mortgage landscape remains very different to how it looked at the start of March before the coronavirus crisis and lockdown hit.
What's similarly obvious is the challenges the economy faces as Britain tentatively navigates its way out of lockdown and job losses keep coming with more forecast when the furlough scheme ends.
Less than five months ago, Britain was in the grip of a fierce mortgage price war.
Banks and building societies were battling it out to take rates ever lower right across their mortgage ranges.
If you had a big deposit you got the best deal, but if you only had 10 per cent or 5 per cent to put down then there was still plenty of choice.
As Britain went into lockdown and the property market went into the deep freeze this abruptly changed.
Lenders took the axe to their smaller deposit mortgages. The difficulties of working from home and the need to deal with a rush of customers asking for mortgage holidays took the blame for this, but there was another major factor at play – the fear of falling house prices.
Nobody could ever remember the property market being unceremoniously paused before, so no one was quite sure what would happen.
A best guess was that this pause, combined with widespread furloughing, economic shock and a wave of job losses, did not spell good news for house prices.
Fearing that anyone borrowing with a 10 per cent deposit or less would be highly exposed to the prospect of negative equity soon, banks and building societies staged a dash to safety and pulled those mortgages en-masse.
As it turns out, the UK property market’s Terminator-style qualities – whatever you think is going to kill it off, it just keeps coming back – mean that since it was unfrozen and viewings, listings and valuations could get start again, things have looked rosier than most thought.
A good barometer of the market is how many ‘reduced’ price property listings you see on Rightmove and there is a steady stream of those coming through at the moment
Speak to many English estate agents and they will tell you that they’ve been pleasantly surprised with how things have been (I am writing about England here, because Wales and Scotland have had different lockdown timetables and Northern Ireland has a distinctly different property market).
At the upper end of the market, particularly in England’s rural areas and popular country towns and villages, agents will tell you that things are buoyant.
Albeit, that’s only for some homes. A good barometer of the market is how many ‘reduced’ price property listings you see on Rightmove and there is a steady stream of those coming through at the moment.
Rishi Sunak’s decision to remove stamp duty from the first £500,000 of a home purchase has given the better-than-expected property market another shot in the arm.
But questions still remain as to whether this will be enough to dodge the most pessimistic forecasts for house prices, such as the Office of Budget Responsibility’s downside outlook of a 2.4 per cent decline this year and 11.7 per cent decline in 2021.
To be clear this is its most pessimistic outlook, but last week in the wake of the stamp duty holiday economists at the Cebr said even taking that into account they expected house prices to fall 5 per cent this year and 11 per cent in 2021.
Big mortgage lenders such as Nationwide seem to think the stamp duty cut help and have been inspired to ease slightly the mortgage crunch hitting small deposit borrowers.
Nonetheless, those 90 per cent mortgages could be pulled again at any time and remain substantially more expensive than a home loan for someone with 25 per cent or 40 per cent to put down. This echoes the scenario after the financial crisis.
And while if house prices do drop 15 per cent, not being able to get a 10 per cent deposit mortgage now might end up doing you a favour, the problem is that after the price drops have come a lack of finance in the future will mean first-time buyers can’t take advantage of cheaper property.