The mortgage industry can be confusing to understand at the best of times, and it seems even more so in the midst of the current economic turmoil. What does the current state of mortgages mean for retailers in the KBB industry? And is the situation likely to get better, or worse, as time goes on? To find out, kbbreview spoke to Iain Swatton, director at Exemplar Financial Services.
Q: Can you set the scene on where we are for anyone looking to buy a house or refurbish their homes with a new KBB project?
A: I think we are in very challenging times: Inflation is incredibly high, we have a war in Ukraine, the cost-of-living crisis, and the aftermath of Covid – all of which have created a mortgage timebomb for many, and that’s creating a real level of uncertainty within the market. There are around 1.4 million people coming off fixed rate plans in the next 12 months and probably two thirds of those people will have been on rates of less than 2%. The rates that they’ll be going on to now will be around 5%, so they’re seeing an increase of around 2.5 times in their rates. We’ve never seen an increase of that level within such a relatively short rate of time.
Q: How does the current situation compare to previous periods of economic uncertainty that we’ve seen historically?
A: Compared to the aftermath of the credit crunch around 2008, along with the higher interest rates, house prices are also currently at a historic high. Although you may be looking at a 5% interest rate and thinking “that’s nowhere near the rate I used to pay,” we need to remember house prices have never been higher. Therefore, mortgages are taking up a much bigger percentage of people’s disposable income. The average mortgage holder has seen their payment increase by £1300 over a year. If you combine that with the cost-of-living increases, suddenly people have got a lot less money to spend.
Q: For the KBB market, re-mortgages are also incredibly important because a lot of home refurbishments are funded that way. If people can’t afford those repayments without adding any more on, they’re unlikely to consider that while the rates are the way that they are. Are there any signs that the re-mortgage market has been affected?
A: Actually, that’s the market which has probably been most affected, because people coming off of fixed rates now have got to either stay on their lender’s standard variable rate – which is on average around 7.7% – or they re-mortgage to a new rate. If it’s typically a fixed rate of 2 or 5 years, you’re looking at an average of 5 or 6%. So, there isn’t much room to finance for additional borrowing. There’s a slowdown within the purchase market because it’s in a very benign state right now, with a lot of wait-and-see uncertainty. The mortgage market is very much reliant right now on its re-mortgage transactions, but what we’re not seeing is a great deal of people looking to increase their borrowing for home improvements specifically.
Q: That’s probably going to have a huge impact on people selling kitchens and bathrooms, particularly considering the big chunks of money which these things cost. There’s a lot of talk about what the government needs to do, but of course the government can’t control interest rates. What action can mortgage lenders take?
A: They’ve spoken about putting measures in place to potentially extend mortgage terms, or putting people onto interest-only plans without impacting their credit. Lenders are now also starting to look more at green innovative mortgage plans. They’re encouraging mortgage buyers to invest more in the kitchen or bathroom to improve the energy efficiency rating of their property. That’s also likely going to be a driver to marketability of properties in the future. By offering incentivised rates and additional lending through the green agenda, we could see low rates being offered to encourage people and reward those who buy energy-efficient homes. We’re already seeing lenders giving cashback rewards to customers for investing in the green credentials of their home, and I think we’ll start seeing more and more of that.
Q: So, anyone who sells anything sustainable for the home – i.e., windows, insulation, kitchens, bathrooms, appliances – they’re going to start seeing the benefits?
A: Absolutely. If the person selling those products can give a green angle – or identify what impact that investment will have on the efficiency of the home – they’ll benefit as lenders incentivise borrowers to invest in their homes to improve their energy efficiency. There will also be more innovation to get borrowers to want to do that too. Things such as preferential rates, reduced rates, grants, and those sorts of things. They’re being a bit vague right now because there aren’t a lot of those types of mortgage products around, but I am aware that there’s a lot of talk about how the government can invest in the housing stock to make it more energy efficient.
Q: Broadly speaking, what do you think is going to happen next?
A: Experts are predicting that house prices will be lower in 2023/24 than they were previously, but likely still above where they were pre-pandemic. They’re also predicting that the high rates will remain for the rest of this year and probably for the rest of 2024, but will probably come down towards the end of next year. We might have these headwinds and uncertainty for the rest of this year, but then we might hopefully see some improvements afterwards.