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Demand for mortgages for homebuying in the UK tailed off in the last three months of 2021 and will continue to cool in the next three months, even as credit conditions for borrowers are expected to remain loose, according to a closely watched survey.
In the wake of the end of a stamp duty holiday in England and Northern Ireland, mortgage lending declined in the last quarter of 2021, according to the quarterly survey of credit conditions from the Bank of England. Polled as fears of interest rate increases are rising, lenders predicted it would retreat further over the current quarter.
But mortgages are also expected to become more widely available, as lenders anticipate an easing of conditions for borrowers with smaller deposits. In the survey, which measures the net balance of opinion among respondents, the number of lenders predicting credit conditions would loosen over the next three months exceeded those saying it would tighten by 15 per cent.
Last year’s housing market was characterised by a sharp rise in the number of sales, fuelled by the stamp duty holiday and second home purchasers, and soaring house prices. But the picture for 2022 is dominated by expectations of mortgage interest rate rises and a shortage of supply as fewer homes are available for sale.
The Bank’s regular survey suggested lenders were taking a favourable view of the course of the pandemic recovery and are increasingly confident in the sustainability of house prices, giving them more appetite to lend, according to Andrew Wishart, property economist at Capital Economics.
“A balance of 30.7 per cent of lenders reported that they expect to become more willing to lend to buyers with less than a 10 per cent deposit, suggesting concerns about a drop in house prices have eased further,” he said.
While the outlook for credit conditions is positive, the prognosis for mortgage lending activity overall is harder to read, as mortgage rates remain attractively low but rising inflation threatens business and consumer confidence, and future rises in mortgage rates could exacerbate problems for those struggling to pass lenders’ affordability tests.
Some experts had expected mortgage activity to rise in the first three months of this year, as homebuyers and those looking to remortgage seek to lock in low rates ahead of expected further rises in mortgage rates, following December’s rise in the Bank of England’s main interest rate from 0.1 to 0.25 per cent.
Anthony Codling, chief executive of property platform Twindig, said he was surprised that lenders expected a drop-off in demand. “We would expect remortgaging activity to increase as homeowners look to lock in attractive mortgage rates and home buying activity to increase as the UK economy starts to reopen and the spring selling season commences.”
A balance of 70 per cent of lenders reported higher demand for remortgaging in the fourth quarter — up from 35 per cent in the third quarter — but the survey also found more lenders were expecting remortgaging to fall back over the next three months.
Mark Harris, chief executive of mortgage broker SPF Private Clients, said he believed the outlook for remortgaging remained strong. “With many mortgage deals set to expire this year, it is likely that many borrowers will take the opportunity to remortgage, particularly given the cheap fixes still available and the potential threat of rising interest rates.”
In the short term, the supply of homes for purchase is set to be a prominent factor for the market, as stock on agents’ books was sold last year without being replaced in sufficient numbers by new instructions.
In a paper reviewing the 2021 housing market and the outlook for 2022, Neal Hudson, director of research company Residential Analysts, said the supply situation was now “severe”, with property sites Rightmove and Zoopla, and surveyors’ body Rics all reporting low levels of stock for sale.
Tight supply gives support to high prices. But even if mortgage interest rates were to rise substantially in 2022, he added, overall market sales were likely to suffer before prices fell.
“Most existing homeowners will be unwilling to accept lower offers due to price anchoring [the bias towards an existing price] while a smaller proportion of the public will be able to afford to borrow the necessary amount they need to buy at higher mortgage rates. That suggests the most immediate casualty of higher mortgage rates is more likely to be transactions than house prices.”
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