Lucy Waters - Managing Director, Aria Finance
If you had to sum up the residential mortgage market in the first six months of 2023 in three words, what would you say? Challenging? Difficult? Perhaps frustrating at times?
By the time you read this, we will have reached the halfway mark of the year, making it the perfect time to reflect on the state of the market so far in 2023.
It also gives us an opportunity to ponder what the next six months have in store for us as a sector.
Every broker's experience will be different, but I would imagine the vast majority have found the resi market relatively tough so far, compared with previous years.
That is especially true of the purchase market, which has suffered most from the undesirable combination of rising interest rates a cost-of-living crisis.
We only have data covering the first quarter, but we can see the hit to borrower affordability has already dampened purchase volumes.
In fact, if you look at borrower numbers, this is the worst first quarter for purchase lending in a decade, according to UK Finance.
That was to be expected, though. When finances are tight and rates are rising, buyer confidence begins to dip and there are fewer house transactions.
Avoiding the crash
Thankfully, we have avoided a full-blown housing crash - for now, at least - but there is no denying that the market has cooled.
House prices may have risen in April, according to the latest price index from Nationwide, but they are down around 4% from their August 2022 peak. This means brokers have had to plug the shortfall in their revenue with remortgage and product transfer business.
Remortgage activity is also down - by some 10% year-on-year, according to UK Finance - but the number of borrowers remortgaging in the first three months of the year is more or less in line with the average of the past 10 years, so things are not as bleak as that number suggests.
Anecdotally speaking, a lot of brokers who introduce to us tell us that they have written significantly more product transfer business than remortgage business this year. This is perhaps unsurprising, given that many existing borrowers are facing the same affordability restraints as purchase customers.
In our experience, borrowers opting for a product transfer in the current market do so grudgingly; they don't like the idea of locking in at a higher rate, but it is preferable to taking the risk of going onto a variable rate.
That's why, for all the noise surrounding tracker mortgages, the number of borrowers plumping for this type of deal is still relatively small.
So far then, while the residential market in 2023 has been challenging, it has been far from a disaster, which is something to be celebrated given the economic backdrop. But where does that leave us for the rest of the year?
That's difficult to say, and a lot of it will depend on what happens to interest rates and inflation. But overall, the second half of the year is unlikely to be very different from the first.
Markets are pricing in one more base rate increase, taking the benchmark rate to 4.75% later this year. However, that is far from certain given how stubborn inflation has been in the UK.
Swap rates have increased noticeably over the past month, reflecting that uncertainty.
As a result, we can probably expect to see mortgage rates creep us as we enter the third quarter. That said, there is immense competition in the market at present, which will act as a counterbalance to increased funding costs.
This means purchase lending will likely remain subdued, unless inflation drops suddenly and the Bank of England becomes more dovish.
All of this doesn't mean brokers cannot have a successful year. There remains a huge opportunity in remortgage and product transfers.
The increase in product transfer business naturally means less capital raising, which also opens up a good opportunity for brokers in second charges.
In a rising rate environment, borrowers become increasingly nervous about their outgoings and often want to consolidate their existing unsecured debts. This is where a second charge loan can help even those who have accepted a product transfer from their existing lender.
This is an increasingly difficult market for borrowers to navigate. Given the uncertainty surrounding interest rates, those coming to the end of their fixed rates arguably need good advice more than ever before.
Therefore, it's important we spend the next six months reaching out to our bank of existing clients and helping them navigate the uncertainty.