Brexit and the UK Mortgage Market

In a couple of weeks’ time, we’ll all be complaining about that missed penalty that evicted England from the European Championship.

Right now we’re reacting to the nation’s decision to leave the European Union. Right or wrong, like it or not, we’re going to leave and I’d like to shed some light as to what impact this will have for those involved in the burgeoning mortgage market here in the UK.

The financial markets have reacted already, they always do when there’s a shock to the system, and they’ve done so in the past. Markets crashing doesn’t always lead to a recession. The markets crashed in 1987 but didn’t lead to recession, again in 2001 following the 9/11 disaster, but again, no recession.

Recessions are caused by shocks to the system, seismic jolts that send confidence plummeting. Businesses stop investing, consumers stop spending. The UK is a predominantly consumer led economy, something China covets. As a result, when consumers lose confidence they stop spending and button down the hatches. Businesses therefore lose sales, they cut back and redundancies happen. People have less money and so spend less. GDP falls and hey presto you have a recession.

There is no reason at all why the EU shock will cause a recession. Nothing economically has changed. Our economy is nowhere near overheating with rising interest rates and inflation in double digits. The signs are not there yet for a recession. We’ll remain a member of the EU until at least 2019, by then we’ll have trade deals organised across the world.

To the mortgage market next. Is this a special case? It’s part of the financial market clearly and London will be disadvantaged over leaving the EU. Whether it remains the world’s greatest financial market reigning supreme in Europe, remains unclear. Passporting will prevent banks dealing in Europe automatically but then again our Financial Conduct Authority is one of the most robust regulators in the world often invoking new regulations way before the European Union. Witness the European Credit Directive. We’d already enacted most of the provisions anyway.

The mortgage market and clearly the housing market, is mainly domestic and relies on supply and demand plus confidence. Mortgages and the housing market work together naturally, but house prices are not correlated with mortgage demand. Supply and demand determines house prices. If supply is restricted and demand strong, then prices increase. Likewise when demand falls, prices may stagnate or fall. It’s the number of transactions that affects the mortgage market. It doesn’t matter what the prices of property are, people generally still need a mortgage.

Clearly supply of housing isn’t going to change dramatically. It takes time to build. So we look to demand for housing to see if this will affect transaction numbers. Here’s the facts:

Will fewer people want to buy? Possibly, especially if prices do fall, people might wait. The buy to let market will have an impact here. The B2L market has tanked much to do with George Osborne’s continuous assault on private landlords. He stated quite clearly that he didn’t want first time buyers to be pushed aside by landlords when it came to buying property. That’s all stopped now. The B2L numbers have plummeted. Private landlords are pulling out or holding onto their stock. Business landlords are continuing to buy but the numbers are small in comparison. First time buyers who are known as generation rent, will prefer to buy rather than rent and if house prices do stagnate or fall slightly, then this will make their buying more affordable. I believe transaction numbers will increase in the first time buyer end of the market and these people are lucrative for mortgage brokers, they have plenty of mortgage and protection needs.

The cost of mortgages may even come down. There’s talk the bank of England may reduce interest rates in the short term first to 0.25% then maybe zero to stimulate the economy. Remember they have a well thought through contingency plan in place for Brexit.

Of course, the mortgage market doesn’t rely totally on housing transactions. The re-mortgage world is about to take off. Since MMR many people were unable to re-mortgage as the terms and conditions imposed by the risk averse banks prevented them from changing lenders. These prisoners are now free since the mortgage market is beginning to shed the shackles of the MMR and these people have an enormous pool of mortgage providers to now consider with much more flexible affordability and lending rules.

Expect the re-mortgage market to feed you over the next few years.

The elderly market is booming. Equity release, lending beyond retirement is hotting up as we speak. If you’re not planning to get into this market, then think again. And do it soon, others are. Obtain the exams yes, but review the way you give advice to this generation of baby boomers. They want relationships, personal contact, patience and they’ll also involve their children in the conversations so you’ll need to be able to adapt your style to embrace this.

Finally we have protection. If you’re not advising protection, then start. It not only provides a steady stream of commission payments it’s also the right thing to do ethically. The hordes of first time buyers need protecting, they often have young families. The millions of EU citizens in the UK will be looking for stability and security so they’ll want to buy. They’re not going anywhere, they like it here and the UK likes them. They are industrious, better educated in many cases, entrepreneurial, they pay taxes and national insurance and have solved our demographic time bomb. That’s the reason Germany is embracing immigration. It’s having a top heavy elderly population that causes issues, look to Japan for an example of that.

Get some suitable training on protection, CeMAP hardly touches the surface. Organise your sales process so it involves a discussion very early on; sow the seed for protection and its importance with your customer. Make it part of the overall package and the way you work.

So my argument for mortgage advisers is to keep calm and get on advising. Transaction levels affect mortgage demand not house prices, re-mortgages are about to burgeon, the lending to the elderly market is ripening, first time buyers or generation rent are queuing up to buy the properties previously grabbed by landlords and the ability to diversify into related business areas such as protection advising, wills advising are around the corner.

It’s too early for a recession, the signs are not there. The economy is far from overheating. The financial markets will bounce back, the pound will climb again. Nothing materially has changed. We were a reluctant member of the EU anyway, on the periphery in many areas – Schengen and the Euro prime examples of our disinclination to totally absorb the European adventure. We’ll have trade deals soon enough and London will remain the great city it’s always been.

Britain is great. Wimbledon, Pimms, and wet summers. Pork pies and bully beef. Losing penalty shoot outs against the Germans. And there’s always time for a cup of tea.