Mortgage lending to reach record high in 2021

Mortgage lending this year is set to increase by 31% compared to 2020, new data from UK Finance reveals.

The data from UK Finance, which is a trade association for the UK banking and financial services sector, found that estimated gross lending during 2021 will reach £316 billion. It also projects that next year lending will fall to £281 billion before rising to £313 billion in 2023.

Although the pandemic has continued to impact the UK’s economy throughout 2021, this year has seen mortgage rates fall to record lows, which along with incentives such as the Stamp Duty holiday, may have encouraged consumers to remortgage, move home or take their first step onto the housing ladder.

James Tatch, Principal, Data and Research at UK Finance, is optimistic about the future of mortgage lending. He said: “2021 has been a bumper year for mortgage lending amid the Stamp Duty holiday and homeworkers moving from cities. The outlook for the housing and mortgage markets over the next two years is for a return to a more stable, balanced picture following the upheavals of the last two years. While risks remain, both to new lending and ongoing affordability, the market looks to be emerging from the pandemic in a better place than previously anticipated, supported by a much-improved wider economic outlook.”

Despite optimism about the economic outlook, many borrowers will be concerned with rising inflation and the possibility of a Bank of England base rate rise. If base rate is increased, this will likely see rates on variable mortgages start to rise within weeks of the increase, however it may take longer to filter through to fixed rate deals.

Already mortgage rates on deals that require deposits of 40% and 25% are starting to rise. On 1 October, for example, the average rate on a two year fixed deal that needed a 40% deposit stood at 1.43%, today it stands at 1.72%. Similarly, the average rate on a five year fixed deal needing a 40% deposit stood at 1.65% on 1 October and today is now 1.98%.

Meanwhile, those looking for a two year fixed deal with a 25% deposit would have found that the average rate on 1 October was 1.98%, but today stands at 2.21%. The average rate on a five year fixed deal needing the same deposit was 2.23% on 1 October and today stands at 2.45%.
First-time buyers, however, will have seen average rates on deals needing a 10% deposit falling over the past few months.

On 1 October the average rate on a two year fixed deal needing a 10% deposit stood at 2.56%, this fell to 2.51% on 1 December, but since then has increased to 2.54%.

Borrowers looking for a five year fixed deal requiring a 10% deposit would have found that on 1 October the average rate stood at 3.05%, which fell to 2.95% on 1 December and has fallen again to stand at 2.94% today.

Although first-time buyer mortgage rates have been falling since October, during December the average two year rate has started to rise, which could mean that rates on deals needing a 10% deposit may start to rise early next year.

In a Bank of England report published this week, the Financial Policy Committee (FPC) recommended that next year it consults on loosing affordability tests on securing a mortgage.

Rachel Springall, finance expert at Moneyfactscompare.co.uk, said: “Loosing affordability tests may make it easier for first-time buyers to borrow a higher amount than they can currently secure on a mortgage. As a result, this could enable more buyers with a low deposit of 5% or 10% to get their first foot onto the housing ladder.

“Critics of this move, however, may argue that loosing affordability tests will result in house prices increasing and could leave the market open to the same risks that contributed to the 2008/09 financial crisis. However, Andrew Bailey, Governor of the Bank of England, said the move would be an ‘efficiency point’ and not relaxation of lending standards.”