View more on these topics

Alan Lakey: Rate increase bombshell is looming

Alan-Lakey-MM-Peach-Byline.jpg

As advisers we are often expected to be adviser, marriage guidance counsellor and priest. But perhaps the most fearsome aspect of our craft is the requirement to be clairvoyant.

Clients somehow expect us to be able to predict the most appropriate asset class and, within that class, the most appropriate fund. While I strive to convince them that I am not a magician and cannot accurately predict the future –regardless of the fee – there are rare occasions when the planets are in alignment and the likelihood of a given outcome rises from 50/50 to 90/100.

This brings me to the present housing market. Exceptional forces have been at work to bring about an explosion in property values unprecedented since the last century. What makes this eruption different and unsustainable is the set of circumstances that have caused the boom and the natural economic forces opposing its continuation.

Consider what has created the spurt. In many areas property prices fell back during 2007-2011 and amid the economic uncertainty many would-be borrowers were loath to enter the market or to upsize. Then, within a brief period, we experienced an emergence from the economic gloom, the introduction of Help to Buy schemes and an increasing inflow of foreign money into the London market. 

These factors, added to historically low borrowing rates, boosted demand, and prices have soared to the extent that 43 is now the average age of a first-time buyer in London.

So, why the darkening clouds? Let’s start with the imminent interest rate rise. How many current borrowers were in the market when base rates were above 5 per cent? Many of those who recall pre-2007 rates will be vulnerable to modest rises because they are on 2.5 per cent floating rates or lower. For interest-only borrowers in this situation a 1 per cent rate rise will represent a 40 per cent increase.

Help to Buy schemes have introduced many to home ownership, accelerating a process that might have seen them not entering the market until 2015/16. It is a similar story with home movers who have upgraded a year or two early with help from the schemes. This situation is not too dissimilar to former chancellor Nigel Lawson removing tax relief for unmarried couples and giving them five months’ notice, creating a rush and establishing a false market. To this, add the Mortgage Market Review, which is making it impossible for some borrowers to move sideways, let alone upgrade, because they find they are offered lower mortgage amounts than they currently have.

Many interest-only borrowers have become mortgage prisoners, with lenders ignoring or reinterpreting FCA rules. Many are forced to switch to  repayment loans when negotiating a new rate or looking to remortgage or move. Those not on fixed rates will be the hardest pressed when rates rise.

Jump ahead to autumn 2015 and I can see house prices down 10 per cent owing to a mix of forced sales and downsizing, allied to a lack of demand. Repossessions will naturally rise, which also affects property prices, creating a spiral.

Gloomy? Maybe. True? Probably.

Alan Lakey is partner at Highclere Financial Services 

Recommended

Toby Strauss, Scottish Widows
1

Scottish Widows chief warns of post-Budget capacity problems

Scottish Widows chief executive Toby Strauss has warned the pensions industry is close to breaking point in the wake of the Budget as the provider continues to struggle with customer service problems. The insurer was criticised by industry insiders earlier this year, with sources saying it was taking up to 30 days, on average, to […]

What advisers are saying

Editor’s comment of the week: Automation in financial services can go only so far  The advice and technology debate seems to be driven by four factors: providers wishing to cut costs; intermediaries still wishing to “cop” commission; minimising the compliance burden; and IT providers salivating at the prospect. But let us consider some other points. How many people […]

Real-estate-agent-house-for-sale-sold-700.jpg
1

Lenders adapt valuation models as surveyor shortage bites

The impact of the continuing surveyor shortage was laid bare last week in research revealing up to four in every 10 sales fails to reach completion because of the delays buyers face in getting properties valued. The research, by property search agent The Buying Agents, shows as many as 40 per cent of property purchases […]

Robert Sinclair: Silence on controls for all mortgage advisers is deafening

In harmony with painting magical solutions to perpetual problems, in June 2010, the FSA offered up one of the agreed quick wins from its nascent Mortgage Market Review by delivering near-final rules on a registration process for all mortgage advisers. As the regulator encountered increasing problems and then became mired in its  transformation into the […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

There are 12 comments at the moment, we would love to hear your opinion too.

  1. The result of people borrowing what they could never afford in the first place.

    When (if) interest rates finally rise it will probably be a risible amount – 2%? It will be a long while before the solvent cease to subsidise the feckless

  2. I am shocked by just how misleading and pointless this article is. I expected better from you Alan.

  3. Alan—the only thing that I disagree with is your timing.

    I think that we may not have had the first rate rise by August 2015 but whatever happens if the unwary don’t take the next 12 months or so to get rid of their non mortgage related debts and beef up their credit-worthiness they are going to be in a lot of trouble when they try to re-finance their low SVRs

  4. MMR didn’t cause too many problems there were some stupid questions such as how much do you spend on dog food but as it was working on actual affordability it was in my opinion in principle sensible if a little too onerous.
    The 7% stress test has been the straw. Currently lenders are cutting rates because they aren’t hitting lending targets they have little wriggle room left to ease criteria so property prices if the 7% stress test is in place property prices have to fall by how much is the question.
    I suspect the b of e’s driver with the 7% or current svr plus 2 was to force the lenders to drop there svr which Skipton have just done.

    Which ever way you look at it help to buy b of e trying to run the lenders business for them its a constant tinkering with the market which in my opinion is not a good thing. I imagine the fca and b of e must be like living in an episode of yes minister where the decisions are taken for obscure reasons by people who are not competent.

  5. I think you may well be right, Alan and one reason the MPC has been putting off what must happen sooner or later is to give borrowers as much time as possible to prepare for the pain of higher, possibly much higher, mortgage payments

  6. I totally agree with Alan and with the later comments. I don’t know who Mr Pearman is, but it is poor to slate someone without bothering to give any reasons.

    And, yet again Harry, you are not living in the real world and I suspect you are promoting the interests of wealthy savers and investors by criticising borrowers.

    A 2% rise would slaughter many borrowers in the short term partly because they are, as Alan rightly says, mortgage prisoners. This is not the fault of the MMR; it is the fault of the regulator for the climate that they have created. It is not that they have just moved the goalposts; they have moved the whole flaming stadium and told nobody the directions to get to it!

  7. Pretty melodramatic stuff. We all know Help to Buy actually had a very limited impact in areas where price explosions and when buyers do come off their rate, likely worst case scenario is a lower SVR rate. Rest of the article seems pointless and inaccurate.

  8. Once again, another article showing why Alan Lakey should be ignored. One of the reasons why so many clients will be in trouble is because they overstretched themselves to buy properties they could not afford by using interest only.

    As usual, what appears to be an sensible article is just another excuse to have another dig at the regulator and MMR.

    yawn yawn yawn

  9. Some poor comments here – there is a large degree of misunderstanding as to the difference between what was finally agreed in MMR and how lenders themselves have restricted their lending as a result of the credit crunch, the pre-MMR consultations and interim field visits by the Regulator.

    The biggest enemy of TCF is lack of competition and, if a lender has captive clients, competition ceases to be a factor. It has little to do with over-stretching but a lot to do with Mortgage Prisoners not meeting new affordability interpretations.

    An example is where a sixty-year old with a solid pension and 20 years left on his mortgage term suddenly finds that he cannot change lender because almost everyone is insisting on calculating affordability over a term of five years.

    In a society where divorce and disruption are common, it is not right to accuse the public of fecklessness or irresponsibility. It is, however, correct to accuse the FCA of taking an irresponsible one-size-fits-all approach to the mortgage market and of failing to correct the imbalances created by their own ill-conceived actions and pronouncements in the lead-up to MMR implementation.

    I would much prefer Alan to be proved wrong, but events may well prove him to be right. I for one would take no pleasure from that.

  10. Listening to people who have a different opinion is essential for ones development. Seeing two sides to an argument where both hypotheses have validity is the real world. Keynesian for Monetarism, pro choice, pro life and so on.
    I don’t agree with Harry K nor Alan L on everything, nor Rory Percival, but it doesn’t mean I don’t want to hear or respect their opinions.
    There are one or two things which for me ARE black and white, but the world is very grey overall.

  11. Some poor comments here – there is a large degree of misunderstanding as to the difference between what was finally agreed in MMR and how lenders themselves have restricted their lending as a result of the credit crunch, the pre-MMR consultations and interim field visits by the Regulator.

    The biggest enemy of TCF is lack of competition and, if a lender has captive clients, competition ceases to be a factor. It has little to do with over-stretching but a lot to do with Mortgage Prisoners not meeting new affordability interpretations.

    An example is where a sixty-year old with a solid pension and 20 years left on his mortgage term suddenly finds that he cannot change lender because almost everyone is insisting on calculating affordability over a term of five years.

    In a society where divorce and disruption are common, it is not right to accuse the public of fecklessness or irresponsibility. It is, however, correct to accuse the FCA of taking an irresponsible one-size-fits-all approach to the mortgage market and of failing to correct the imbalances created by their own ill-conceived actions and pronouncements in the lead-up to MMR implementation.

    I would much prefer Alan to be proved wrong, but events may well prove him to be right. I for one would take no pleasure from that.

  12. @ Stuart Duncan

    In the real world it is the savers that provide the means for borrowers (unless you want to go back to the Bear Stearns and Lehman fiscal engineering).

    Without savers and investors (who are by no means all wealthy – just prudent) there wouldn’t be ANY mortgages.

Leave a comment

Close

Why register with Money Marketing ?

Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

News & analysis delivered directly to your inbox
Register today to receive our range of news alerts including daily and weekly briefings

Money Marketing Events
Be the first to hear about our industry leading conferences, awards, roundtables and more.

Research and insight
Take part in and see the results of Money Marketing's flagship investigations into industry trends.

Have your say
Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

Register now

Having problems?

Contact us on +44 (0)20 7292 3712

Lines are open Monday to Friday 9:00am -5.00pm

Email: customerservices@moneymarketing.com