Is The Mortgage Market Review Slowing The UK Property Market?
The number of new mortgages being approved by lenders dropped to an 11 month low in May 2014 as the new affordability rules brought in by the Mortgage Market Review (MMR) caused borrowers to be put off and delayed hundreds of existing mortgage applications.
The Mortgage Market Review brought in on the 26th April 2014 requires all UK based mortgage lenders to carry out rigorous affordability checks on the financial status of borrowers.
These stringent affordability checks include stress tests designed to determine if a borrower could continue to repay their loan if interest rates rise significantly.The real impact of the new affordability rules has now been made apparent as Bank of England data shows mortgage approvals for residential property purchases dropped from the 66,507 mortgage approvals in March and 62,806 approvals recorded in April to 61,707 mortgage approvals in May 2014. May’s figures are 11% below the six-month average of 69,320 mortgage approvals.
The Bank of England’s data shows that mortgage approvals for residential property purchases have now fallen for 5 consecutive months, as figures show that there were 75,838 mortgages approved for residential property purchases in January 2014.
However, despite the falling number of mortgage approvals, the financial amount advanced to new residential property buyers increased by £1.988 Billion (GBP), the most since July 2008, and in the three months to May the value of lending rose at an annualised rate of 1.7%, its fastest growth rate since September 2008, reflecting the continuing rise in residential property prices.
The BoE figures come less than a week after Bank of England imposed mortgage lending caps on banks that will see them able to lend only 15% of new mortgages at multiples of 4.5 times or above borrowers’ incomes.
Recent data published by the British Bankers’ Association (BBA) has also shown the lowest recorded number of new mortgage loan approvals since August 2013 as well as a drop in remortgaging activity, with approval figures down from 31,131 recorded in April to 29,240 in May.
Governor of the Bank of England (BoE), Mark Carney, has suggested that UK interest rates could reach a new normal level of 2.5% by 2017 although he refused to be drawn on the timing of the first rate rise saying the public needed to look at the big picture.
Economists predict that UK residential property prices will continue to increase over the coming months, although some expect that there could be some easing back in house price gains from previous very strong increases
Howard Archer, chief UK and European economist at IHS Global Insight said house prices still looked more likely than not to see clear increases over the coming months, stating; “It is now very clear that the introduction of new regulations under the MMR has, at least temporarily, taken some of the steam out of housing market activity. It remains to be seen whether this loss of momentum in housing market activity is lasting, and whether it significantly dilutes the recent marked upward pressure on house prices. It also remains to be seen what impact there is on mortgage lending from the Bank of England’s recently announced recommended macro-prudential measures.”
Data correlated for June 2014 should reveal the true impact that the MMR rules are having on potential mortgage borrowers, but there is every indication that existing property owners could already be struggling to meet the tighter criteria being imposed by lenders due to the drop in re-mortgaging figures.
This could become a bigger problem when interest rates start to rise, and borrowers could become trapped on mortgages with a high standard variable rate because they would fail the strict lending criteria imposed by the introduction of the affordability testing under the mortgage market review (MMR).
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