In a move which many experts believe highlights the difficult market for first-time buyers in the UK NatWest has announced a reduction in its core loan to income ratio for mortgages. The ratio has been cut from 4.75 down to 4.45 for single and joint mortgage applications with a deposit of between 15% and 25%. It is only when you look at the mortgage rules introduced by the Bank of England back in 2014 that the picture becomes a little clearer.
Is NatWest balancing its mortgage book?
Under the Bank of England rules individual mortgage lenders in the UK are not able to offer more than 15% of their mortgage book in any three-month period at above a 4.5 loan to income ratio. Therefore, the fact that NatWest has reduced its rate for single and joint mortgage applications down to 4.45 would seem to indicate the bank is rebalancing its books. This move would suggest the next batch of mortgage loan figures for the sector could make very interesting reading!
Is this a sign of things to come?
While NatWest is the latest mortgage lender to be in the news, experts believe this situation is being replicated right across the industry. When you bear in mind the loan to income multiples required to acquire property in the likes of London this perfectly illustrates the challenges facing UK mortgage lenders. It looks as though we will see a constant balancing of books in order to meet the Bank of England’s rolling three-month targets. Whether the 15% limit and the 4.5 loan to income multiple will be relaxed in the future remains to be seen.
Will this reduction in liquidity impact property prices?
In a traditional market you’d expect limited liquidity to impact demand and therefore take some of the sting out of the UK property market. The fact is that we are not currently operating in traditional markets with UK base rates forecast to move nearer to 0% in the short term and unlikely to return to anywhere near “traditional levels” until at least 2021. When you bear in mind that base rates have been at their current historic lows for many years now, in light of the 2008 economic collapse, is cheap finance the only thing supporting the UK property market?
Where are the buyers coming from?
Even though there are many would-be first-time buyers hovering around the UK property market many are unable to afford the current loan to income multiples required. It therefore seems to be overseas investors and wealthy domestic investors who are acquiring the lion’s share of property changing hands in the UK. Indeed it is interesting to see an ongoing increase in the number of £1 million plus properties changing hands even though the UK economy a struggling at the moment.
While many experts continue to call the “top” of the UK property market we have yet to see any major correction since the initial reaction in light of the 2008 US mortgage crisis. The London market in particular is going from strength to strength and there seems to be underlying demand. Whether or not the forthcoming referendum on UK membership of the European Union will change the strategies of overseas/wealthy domestic investors remains to be seen.