The number of mortgages increased in June by 4% on the previous month, suggesting that tighter borrowing criteria imposed by the financial regulator this year had only cooled the market for a few months.
The Council of Mortgage Lenders said a survey of the biggest lenders showed that 60,500 house purchase loans, worth £10bn, were taken out during the month, an increase of 5% by number and 6% by value on May's figures. Compared with June 2013, the figures were 15% and 23% higher respectively.
More than half of those loans were taken out by home movers, although the number of first-time buyers showed a bigger month-on-month increase, making up slightly less than half of the total at 28,600. It is thought that a continuing stream of positive data on the housing market will add to the pressure on the Bank to increase rates.
Affordability tests, which force lenders to check mortgage applicants' outgoings as well as their income and to stress-test their borrowing to ensure they can afford repayments if interest rates increase, seemed to dampen the market after they were imposed in April.
The central bank is under pressure to increase rates in response to the booming economy and the sharp increase in the number of people in work. Rising house prices have also triggered calls for an increase from the current historic low base rate of 0.5% to deter buyers and take the heat out of the market.
A house price crash remains a risk to the recovery and policymakers must be vigilant to prevent prices getting out of control.
While some surveys have indicated that more sellers are putting their homes on the market to take advantage of recent price increases, especially in the south east, which might keep the market from overheating, even tighter affordability tests may have to be introduced or rates may need to be increased.
The CML figures showed the average first-time buyer borrowed 3.47 times their gross income to fund their purchase, compared to 3.46 in May, while the typical loan size increased by more than £2,000 to £123,865.
Buy-to-let continues to grow as investors seek better returns than they can earn on cash and more certainty than the stock market. Lenders have been cutting buy-to-let rates and easing criteria in an effort to ensure lending volumes are not too dented post-MMR (Mortgage Market Review), because buy-to-let doesn't come under its remit. Investors are benefitting from cheap mortgage rates, less strict criteria and plenty of demand from tenants looking for decent property to rent.
However, we believe that if the interest rates do rise, potential borrowers are much less likely to secure a mortgage and those with an existing mortgage could very quickly find themselves in financial difficulties, possibly unable to pay a crippling monthly mortgage fee. New homeowners may find themselves forced to rent instead, which would in turn spark a huge rise in rents. We believe that, if this situation arises, prospective homeowners may very soon need to consider other more affordable options such as property guardianship, as they could find themselves temporarily priced out of the housing market.
