30 year fixed rate mortgages – could be on the way back…
Having been slightly caught on the back foot by the strong recovery in the labour market, does Bank of England governor Mark Carney have a strategy to avoid a similar fate in the housing market?
Speaking before a recent Treasury Select Committee, Mr Carney, though acknowledging recent activity in the housing market, played down any fears of a housing bubble, saying: ‘Our general expectation has been for a continuation of current momentum in 2014.’
Even so, the Bank of England remains on-message as regards the potential threat to homeowners of ‘exposure to rising interest rates’, having indicated last November it has plenty of measures at its disposal to control a rising house market beyond the ‘blunt instrument’ of a rate rise which could weaken the wider economy. Amongst preferred strategies mentioned at the time was the possible capping of both loan-to-income (LTI) and loan-to-value (LTV) ratios.
Continuing this earlier theme of potential restraints, the Bank’s Financial Policy Committee (FPC) commented on the positive benefits of US-style ‘locking in’ of mortgage rates to moderate, or even eliminate, the risk of fluctuating interest rates. Echoing this view, external FPC member Richard Sharpe said: ‘Certainly, the structure of the UK would have lower risk associated with the housing market if more mortgages were fixed, and fixed for longer.’
This has prompted speculation about the return of 30-year fixed rate mortgages in the UK allowing borrowers to lock-in initial interest rates for the duration of the mortgage term. Though Mr Carney does not quite see it that way, the risk to house buyers is clearly under scrutiny.
Revisiting the feasibility of capped ratios, Mr Carney appeared to rule out an LTV cap, suggesting to the Select Committee that this would just delay buyers who could afford mortgage repayments by forcing them to save higher deposits. However, Mr Carney saw value in tightening LTI requirements and indicated the Bank may recommend a ‘qualifying interest rate’ for prospective borrowers. This would be set considerably higher than the initial mortgage repayment and serve as a measure of potential affordability and borrower resilience to interest rate increases.
Mr Carney believes the current housing market gains are primarily a recovery from the depression caused by the financial crisis and sees prices rising into 2016. Nevertheless, he feels the surge requires ‘vigilance’ and not ‘panic’.
Opinion is divided on Mr Carney’s prediction. The Institute of Chartered Surveyors have forecast strong growth and warn the market could become ‘unsustainable’ in some areas. Whereas Alex Gosling, managing director of online estate agents Housesimple, insists there will just be a ‘rebalance in supply and demand.’
Whatever the outcome, with household debt remaining a fragile area of the economy, Mr Carney’s margin for error is slim.
Michael Usher is a mortgage broker based in Frimley, Camberley Surrey
