Coming to what is – hopefully – the final round of the Covid pandemic and considering all the changes the past two years have brought to society, the economy and the way we are governed, Mortgage strategy thought it was time to ask a number of lenders what risks they were considering at the start of 2022.
Supply and demand – By far the most common answer was the imbalance between the number of people wanting to buy a property and the number available. “The government has a target of 300,000 new homes each year,” says Nick Hilton, managing director of Glenhawk, “but many believe that target will not be reached until at least 2028.”
Nicola Alvarez, Accord Mortgages’ Senior Director for New Proposals, says: “We are keeping an eye on supply and demand in the housing market – we know there is a persistent imbalance here – but this is increasing the challenges buyers are facing, and if the last two years are anything to go by, could drive house prices up even further, albeit at a slower pace expected.
Interest rate risk – At the time of this writing, inflation does not appear to be waning any time soon, and many believe that the recent upward revisions to the base rate are just the first in a long series.
Hilton comments, “Interest rates will need to rise to keep pace with the rising cost of goods and services. This will force lenders to raise rates in 2022 in the specialty and banking lending sectors. Combined with rate hikes, lenders will need to be aware of these changes to stay competitive in their market.
And MT Finance director Joshua Elash said inflation is “the biggest risk facing the wider economy”.
He explains: “Whether rates rise now or not, they will have to rise to combat the very tangible impact that inflation is already having.
“Unprecedented levels of cash have been injected into the economy by the Chancellor in response to the pandemic. This, after about 12 years of quantitative easing, coupled with historically low interest rates and labor shortages following Brexit, has created a perfect environment for inflation; and it is very real.
Elash continues: “With the significant increase in raw material prices and labor costs, heavy development and renovation projects will be tested with shrinking profit margins. There is a real risk that projects will get bogged down or be abandoned.
“For lenders who have development exposure at the upper end of the LTV of this market, there is a tangible risk of increased forfeitures on unfinished projects, where negative equity positions will be confirmed. If inflation is firmly under control, this could lead to the bankruptcy of one or more specialized lenders in this space.
“Equally, the drug is not painless, as the inevitable base rate hike will challenge the average British household, who have grown accustomed to a decade of historically low interest rates and cheap credit. .”
Paragon Bank Managing Director Richard Rowntree added: “When combined with rising energy and property costs, an increase in interest rates will further increase owners’ overheads, putting additional pressure on already inflated rents due to reduced inventory and will limit tenants’ ability to save. for mortgage deposits.
Energy efficiency regulation – In the buy-to-let market, lenders are monitoring proposals to ensure that all leased properties have a “C” energy efficiency rating for new rentals over the next few years and for all subsequent rentals .
OSB Group Engagement Director Roger Morris said: ‘The Secretary of State has announced that he will be amending the Energy Efficiency Regulations 2015 and we are all waiting to hear what the end result will be, even whether this should come into force in 2026.
“This information needs to be conveyed and considered by brokers and owners, particularly if they are looking to buy or remortgage and wish to lock into a five year fixed product.
“The owner needs to be made aware of these impending legislative changes or they could end up with a property that requires further improvements that have not been considered or considered. In the worst case, the property may be financially unviable and the only solution may be to sell the property, which would then incur prepayment charges.
Rowntree says: “Although this is an issue we raised some time ago, the proposed changes to the energy performance certificate requirements are on the agenda due to the time and funds that will be needed by owners to upgrade the approx. 3.2 million PRS properties currently rated below EPC C, ahead of the scheduled 2025 deadline.”
Affordability – “Lenders are grappling with affordability calculations with a market-wide consideration to increase revenue multiplication or overall affordability,” says Morris.
“This, coupled with the negative impact on household bills due to impending energy cost increases and inflation affecting household bills and the wider economy, means that a balance caution should be maintained.
“If that weren’t enough, there’s also the potential for three base rate changes, so this will certainly be an area of focus for all lenders this year.”
And Alvarez brings another angle: “With the end of the purchase assistance program next year which will impact transactions from this summer, there is a risk that without a direct replacement program and alternative programs not fully in place, there will be a real gap in the first-time buyer market.
“Challenges around affordability and raising enough for a deposit remain for many, so it’s important the industry works together to find alternative solutions.”