It’s that time of year again when we all start to think about what has happened and what will be coming next. There is a lot to talk about on both sides of that particular coin, so this will be the first in a two-part blog. Let’s start by trying to put 2023 into perspective.
Where are we now?
There is a good argument to say that over the last 12 months the foundations of a whole new mortgage market were laid and that, for the foreseeable future, we are looking at a different property landscape. It’s certainly true that there were a lot of changes and even some upheavals last year but let’s start with a little reality check about all this upheaval.
It isn’t unusual for the mortgage world to have a year that is… well, unusual. We really need to remember that it has been remarkably stable for many years. Ups and downs in rates, changing mortgage criteria, market fluctuations and so on, are not rare occurrences if you take a longer view.
Probably the most important thing to recognise is that the current higher interest rates are not actually, historically speaking, unusually high. So, before we look back on the major events of last year, let’s just take a moment to reflect on the fact that in the USA for example, a mortgage will have, roughly speaking, an interest rate that is 1.5% to 2% higher than a UK equivalent. In some European countries, that figure will be slightly lower than in the UK. The reason I mention this is to make a very important point.
It is a mistake to rely too much on comparison when looking at the impact of mortgage rates on the market.
In this instance, what seems to be a huge rise in the interest rates, is only large in comparison to the unusually low rates for the previous years. Or, to put it another way, you could say that what we are seeing in the market now is actually a more usual interest rate and it has actually been unusually, and historically speaking, quite freakishly low for a long time.
So, with that said, what were the major events last year?
Changing Lending Criteria
Lenders adjusted their criteria in response to the evolving economic landscape. For a while we saw a tightening of requirements. Lenders were, after all, going through a period of adjustment, and they were a little more cautious in their lending practices. That was a reasonable and expected response to the changes in rates and the impact of rising inflation. However, as you would expect in such a dynamic market, the lenders soon responded with a series of solutions and new products to free up the market again.
Innovations in Mortgage Products
Last year was one that witnessed a boom in innovative mortgage products designed to meet a more diverse set of needs. Green mortgages gained traction, offering favourable terms for energy-efficient homes. Other innovations included the return of the 100% mortgage and a whole other set of small and large changes to the way suitability was measured. The situation where buyers were being refused a mortgage despite paying consistently more in rent than the cost of the mortgage they were applying for, was recognised as requiring review.
Government Interventions
The government’s role in the mortgage market was also noteworthy. Various schemes aimed to support the property market and ensure affordability for first-time buyers were introduced and, in the interest of fairness, it is probably fair to say they had a varying degree of success. However, without a doubt, Initiatives like the Help to Buy equity loan scheme and the introduction of the mortgage guarantee scheme played a crucial role in aiding buyers amidst the challenging economic climate.
The Impact of COVID-19
I long for the day when I can write an article like this one without needing to discuss the lingering effects of the pandemic on the market. In some respects, despite all the problems it caused, there was an unexpected upside to the Covid problem. The initial lockdowns led to a surge in demand for more spacious properties, and this trend continued as more people sought homes with extra space for remote working. The pandemic also accelerated the adoption of digital technologies in the mortgage process, from online applications to virtual property viewings. As a result of the pandemic, we are now looking at a sleeker, more agile, mortgage lending world.
Conclusion
The past year in the UK mortgage market was challenging, it would be ridiculous to suggest otherwise, but with challenge comes innovation, solutions, and opportunities. Rising interest rates, evolving lending criteria, and the continuing impact of the COVID-19 pandemic shaped the landscape and in response innovations in mortgage products and government interventions provided support and opened new possibilities for homebuyers.
So, looking forward, will this prove to be a year that created a historic change in the mortgage market? Well, quite possibly, yes, or at least one that will result in a new normal. We could well find ourselves looking at a very different mortgage landscape in 2024, and it could be very exciting indeed.