Following the shock decision in favor of Brexit, the UK mortgage market will be affected in the short term by reduced consumer confidence, tighter credit conditions, and uncertainty over interest rates.
As the markets opened following the Brexit vote, banks and housebuilders were among the biggest losers, suggesting that the housing market, and by extension the mortgage market, will be among the most adversely affected.
Demand for home finance will inevitably be dented, as consumers react to the uncertainty generated by the vote by postponing major spending decisions. The London market, dominated by overseas property investors, will also be particularly badly hit, with many of those investors seeking to reduce their exposure to the UK. A chain reaction will mean that property values in all price bands will experience reductions.
The short-term impact on mortgage pricing is also unclear. The Bank of England may decide to cut the base rate in an effort to forestall a negative shock to the economy, which will help to stabilize the current pricing regimes. Furthermore, initial evidence suggests that gilt yields are falling as investors switch out of equities into bonds. This will further help to counteract any upwards pressure on pricing. Moreover, the Bank of England’s decision to inject up to £250bn in liquidity into the banking sector, if deemed necessary, will address any reduction in the supply of credit from the money markets.
On the other hand, should sterling continue to fall against the dollar and other major currencies, the Bank of England may decide to raise rates. This will feed through to more expensive home loans and further dampen activity.
Balanced against these factors will be a temporary rise in remortgaging activity. There are currently a number of cheaply priced fixed rate deals on the market, and existing borrowers may now rush to lock into the best deals, fearing their imminent withdrawal from the market.
The longer term effect of the vote is far more uncertain and difficult to judge. Much depends on how consumer demand develops into 2017 and beyond, and on the capacity and willingness of banks to lend.
Over the next few months, however, activity in the UK mortgage market will suffer as both demand for, and supply of, mortgage finance takes a temporary hit, and lenders will have to reduce their profit forecasts accordingly.
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