Lenders are more cautious, but low interest rates will support the market over the next few years.
In the early months of lockdown, mortgage lenders became more risk-averse. Many tightened their lending criteria and withdrew the higher loan-to-value mortgages that most first-time buyers need. But recently the availability of these products has improved.
Support from government and lenders has protected mortgaged homeowners. As many as 1.9 million of the 11 million households with a mortgage have taken advantage of the mortgage payment holiday scheme which lasts until October 31.
As a result, arrears have been minimal. Lenders have also only been carrying out repossessions which are voluntary or where the home is empty. Additionally, the ban on tenant evictions until September 20 is likely to delay any forced sales by financially- distressed landlords until mid-2021. Therefore we’re unlikely to see the full scale of any repossessions and forced sales until next year.
But due to the lessons learnt from the previous financial crisis, lenders will manage any growth in arrears to limit the impact of forced sales on the market. They also have a range of other tools at their disposal, such as putting households on interest only repayments, to help manage and spread any increase in repossessions next year.
While lenders may remain cautious about lending on larger mortgages and those perceived to be more risky in the first half of next year, we expect the mortgage market to return close to pre-covid times in H2 2021.
The good news for anyone taking out a mortgage is that interest rates are set to stay lower - for longer. The Bank of England base rate is expected to edge down towards 0% in 2021 before rising to just 0.2% by the first quarter of 2025 according to the OBR. This will support the housing market by keeping borrowing costs low for households who are re-mortgaging, or for those making a new purchase.
