People with interest-only mortgages are being urged to take action after the Financial Conduct Authority (FCA) found that many have still not talked to their lender about their repayment options. Nearly one in five mortgage customers have an interest-only mortgage and the FCA is concerned that shortfalls in repayment plans could lead to people losing their homes.
The FCA review covered 10 lenders who represent around 60% of the interest-only residential mortgage market and looked at how lenders are treating these customers to help ensure their mortgages are repaid at maturity. There are currently 1.67m full interest-only and part capital repayment mortgage accounts outstanding in the UK. They represent 17.6% of all outstanding mortgage accounts and over the next few years increasing numbers will require repayment.
In their review, the FCA found that whilst lenders are actively trying to communicate with their customers to understand repayment strategies this was at specific times before maturity rather than targeting those who were considered higher risk. They also found that the processes which customers had to follow to discuss their repayment strategies were, on many occasions, challenging, including delays in getting to speak to advisers, making multiple phone calls and repeating information previously provided.
In 2013 the FCA identified three residential interest-only mortgage maturity peaks. The first peak, happening now, is likely to have more modest shortfalls due to the profile of customers typically being those who are approaching retirement with higher incomes, assets and levels of forecast equity in their property at the end of term. The next two peaks in 2027/2028 and 2032 include less affluent individuals who had higher income multiples at the point of application, greater rates of mortgages converted from repayment to interest-only and lower forecast equity levels; the FCA is concerned that they are more at risk of shortfalls. To help customers the FCA has produced a leaflet encouraging them to take action.
According to the Nationwide Building Society, the annual rate of house price growth picked up to 3.2% at the start of 2018, compared with 2.6% at the end of 2017. House prices increased by 0.6% over the month, after taking account of seasonal factors, the same increase as December.
Analysing the statistics, Nationwide suggest that the acceleration in annual house price growth is a little surprising, given signs of softening in the household sector in recent months. They highlight the fact that retail sales were relatively soft over the Christmas period, as were key measures of consumer confidence, as the squeeze on household incomes continued to take its toll. Similarly, mortgage approvals declined to their weakest level for three years in December, at just 61,000 and although activity around the year end can often be volatile, the weak reading comes off the back of subdued activity in October and November (monthly approvals were around 65,000 per month compared to an average of 67,000 over the previous twelve months). There are few signs of an imminent pickup, as surveyors report that new buyer enquiries have remained soft in recent months. The lack of supply of housing continues to be the most likely key factor in providing support to house prices.
The Nationwide expects performance in the housing market to be determined in large part by developments in the wider economy. Brexit developments will remain important, though these remain hard to foresee with the suggestion that the UK economy will continue to grow at modest pace, with annual growth of 1% to 1.5% in 2018 and 2019. Subdued economic activity and the ongoing squeeze on household budgets is likely to exert a modest drag on housing market activity and house price growth. The subdued pace of building activity evident in recent years and the shortage of properties on the market are likely to provide ongoing support for house prices.
Home affordability across UK cities is at its worst level since 2007, according to Lloyds Bank’s Affordable Cities Review, with house prices rising as a multiple of average annual earnings from 5.6 in 2012 to 7.0 in 2017. Over the past five years, the average house price within UK cities has risen by 36% from £171,745 in 2012 to its highest ever level of £232,945 in 2017. In comparison, average city annual earnings over the same period have risen by just nine percent to £33,420. As a result, affordability in UK cities is, on average, at its worst level since 2007, when the ratio of average house price to earnings stood at 7.5.
The least affordable city is Oxford, where average house prices of £429,775 are over 11 times (11.5) annual average earnings. Truro and Exeter are new entrants into the 10 least affordable cities list, both with an affordability ratio of 9.3 with house prices of £259,705 and £274,093 respectively. Leicester (8.1) and York (8.0) are the only cities outside southern England appearing in the top 20 least affordable UK cities. There are six cities with average house prices that cost at least ten times average annual earnings. In addition to Oxford (11.5), these are Cambridge (10.5), Greater London, Brighton and Hove (both 10.2), Bath (10.1) and Winchester (10.0). The London average figure disguises considerable variations across the capital with central boroughs significantly less affordable than the Greater London average.
Stirling is the UK’s most affordable city for the fifth consecutive year. At £186,084, the average property price in the Scottish city is 4.0 times average gross annual earnings, although this figure has increased by 5% (0.2) in the last twelve months. Londonderry (4.1) in Northern Ireland remains the UK’s second most affordable city. Bradford (4.5) is named as the most affordable city in England and Swansea is the most affordable city in Wales (5.4). Lancaster and Dundee are the only two new entrants to the top 10 most affordable cities, sitting in fourth and ninth place, respectively and all of the top 10 are located outside of the south of England.
Wealthy getting wealthier
The Office for National Statistics has been looking at the wealth of the UK population in their Wealth and Assets Survey this time for the period between July 2014 and June 2016. Aggregate total net wealth of all households in Great Britain was £12.8 trillion up 15% from the July 2012 to June 2014 figure of £11.1 trillion.
The typical household total net wealth was £259,400 in July 2014 to June 2016, up from £225,100 in the previous period (an increase of 15%), and the wealth held by the top 10% of households was around five times greater than the wealth of the bottom half of all households combined. Aggregate total private pension wealth of all households in Great Britain was £5.3 trillion; this has increased from £4.4 trillion in July 2012 to June 2014.
In July 2014 to June 2016, households in the highest income band had a typical household total wealth of £1,039,400. This increased by 17.3% from £886,400 in July 2012 to June 2014. Households in the lowest band of income had a typical total wealth of £32,100 in July 2014 to June 2016. This decreased by 9% from £35,100 in July 2012 to June 2014.
There was a striking increase in the value of net property wealth for households in London compared with all other regions; At £351,000, this is a 33% increase from the £263,000 previously in the July 2012 to June 2014 survey. Total aggregate debt of all households in Great Britain was £1.23 trillion in July 2014 to June 2016 (a 7% increase from July 2012 to June 2014), of which £1.12 trillion was mortgage debt (6% higher) and £117.0 billion was financial debt (15% higher).