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A year in mortgages: Lending booms and tracker rate hikes

The past 12 months have brought the kind of buoyant housing market few would have expected this time last year. 

With talk of a housing bubble, the market as we head into 2014 represents a vastly different picture from the turn of the year.

Forecasts from the Council of Mortgage Lenders originally predicted gross lending would reach £156bn in 2013, up from the £144bn advanced in 2012. At the same time, CML chief economist Bob Pannell predicted the Funding for Lending Scheme would aid a “modest pick-up” in the UK mortgage market.

In its latest forecasts, published this month, the CML says gross lending will hit £170bn this year, rising to £195bn next year.

John Charcol senior technical manager Ray Boulger says: “Looking at the rising lending figures over the year, the main catalyst was the Funding for Lending Scheme, which brought down the cost of funds for banks.

“Coupled with the Help to Buy scheme, the Government has gone some way to encourage greater lending, particularly in the high loan-to-value bands that were absent from the market for so long.”

Help to Buy

Undoubtedly, the Government’s Help to Buy scheme has played a big role in fuelling demand among buyers, and boosting banks’ and building societies’ appetite for mortgage lending.

The scheme was unveiled in Chancellor George Osborne’s Budget in March and the first part, a shared equity scheme for new-build homes, started rolling in April. The second stage, launched to much fanfare in October, featured a Government guarantee in return for a fee from the lender. 

Lender failings and tracker rate hikes

In April, Santander had to write to more than 270,000 borrowers, inviting them to complain, after the FCA found that letters the lender had sent to customers in 2008 before it increased its standard variable rate cap were unclear. The regulator also took a hard line with Clydesdale Bank in September, saying the bank had treated mortgage customers unfairly by miscalculating repayments on more than 42,500 mortgages. A fine of £8.9m plus compensation to borrowers cost the bank an estimated £42m.

Bank of Ireland shocked borrowers in February when it wrote to 13,500 buy-to-let and residential customers on tracker deals warning them their rates would increase significantly.  

For buy-to-let, the rate jumped from Bank of England base rate plus 1.75 per cent to base rate plus 4.49 per cent while for residential borrowers, the rate went from base plus 1.75 per cent to eventually rising to base plus 3.99 per cent. West Bromwich Building Society followed suit in September, telling 6,700 of its buy-to-let tracker customers their rates would increase by 2 per cent in December.

The FCA sent a Dear CEO letter to banks and building societies in November raising concerns that some lenders had approached it wanting to change their mortgage contracts, including SVRs. The FCA is to publish a discussion paper next year on changes to mortgage contracts.

Funding for Lending

New Bank of England governor Mark Carney signalled that he was prepared to take action to head off a housing bubble earlier this month, by moving to scrap the Funding for Lending Scheme from January. The scheme, originally planned to last until January 2015, will still apply for business loans until 2015.

Trinity Financial product and communications manager Aaron Strutt says: “It is interesting the Bank announced its intention to refocus the FLS away from mortgages.  The scheme has been a real driver in lenders offering such decent rates.”

EU directive

This year MEPs passed final rules on the European mortgage credit directive. The reforms, aimed at ‘harmonising’ mortgage regulation throughout the EU, include a new rule requiring lenders to provide an extra APR outlining worst case scenarios for borrowers.

Under the dual APR rule, mortgages where borrowers are tied in for less than five years will have to include an APR for what they are paying during the lock-in period and a worst case -scenario showing the most they could have been charged on a lender’s SVR over the previous 20 years.

Positive outlook

Overall, despite the pulling of the plug on Funding for Lending, brokers are optimistic going into 2014.

Strutt says: “Towards the end of this year, mortgages have got better for first-time buyers, which is great news. Over the last few years, first-time buyers have really struggled to get a mortgage and this market is now a lot more attractive for them. 

“The return of 5 per cent deposit mortgages is something that the market has been needing for many years now.”

At a glance: The biggest mortgage stories of 2013

  • March and October: Help to Buy, the Government’s flagship Budget policy, rolls out in two phases.
  • September: Clydesdale Bank hit with £8.9m fines after miscalculated repayments on over 42,500 mortgages.
  • November: The Bank of England announces Funding for Lending Scheme will be scrapped for mortgages from January.
  • December: EU Mortgage Directive passes.

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