House prices have reached new heights in the last 15 years, growing on average 56% since January 2008. However, as the saying goes, all good things must come to an end and as base rates started to climb in 2022, it appeared that the end was in sight.

Rate increases were likely after more than a decade of historical lows. However, because of a ‘perfect storm’ of factors – Russia’s invasion of Ukraine, disrupted supply chains, Brexit, the Pandemic, energy cost increases, and domestic political uncertainty - they rose quicker than anyone expected.

Climbing the property ladder has always been central to many people’s life plans. As household costs continue to mount and house prices move further out of reach, many people are left questioning what the future holds for them and their children, and what this means for their hopes and expectations.

What happens when my fixed term ends and I can’t afford the repayments?

Customers with previously cavalier attitudes to borrowing after a decade of nominal interest rates, now face a significant increase in the cost of living, and are less sanguine about being told ‘rates are only returning to normal’. Although this mantra is probably true if you look beyond the last 15 years, it does little for households, who are seeing their salaries buy less and less, and for some, the prospect of losing their jobs.

Since the financial crash and a growth at all costs mindset for many mortgage providers, affordability has rightly been a focus for regulators and lenders. Initiatives, including expanded ‘stress tests’, were implemented to try and make reckless lending a thing of the past. While many of the industry’s actions should be commended, the relaxing of mortgage affordability tests in 2022, just as the base rate was rising demonstrates that institutional memory is short. Whilst borrowers undoubtedly welcomed these changes, it is possible that some would be swayed by the dream of home ownership and may not have been made aware of, or did not fully comprehend the potential risk.

For many borrowers that potential risk has now become a reality. For others, the risk will crystallise as their fixed mortgage terms come to an end (1.4 million borrowers coming to re-mortgage in 2023). Difficult conversations will undoubtedly be had in kitchens all across the UK, as families have to decide where they cut their overheads - housing, heating, or food.

Will Millennials, Gen Z and Gen Y be homeowners?

Home ownership is an aspirational goal for many within the UK. Regardless of generation a house was, is, and still will be many consumers’ most significant purchase.

Consecutive governments have sought to encourage home ownership and ‘gone to the well’ to incentivise first time buyers and stimulate the economy – MIRAS tax relief, Right to Buy Schemes, Help to Buy ISAs and Stamp Duty holidays to name but a few. However, the pandemic surge in house prices and the recent rise in interest rates have deterred many ‘traditional first-time buyers’. Graduates, with stable jobs and respectable deposits have had to seek new approaches to home ownership. The fortunate few have been able to receive support from the 'Bank of Mum and Dad’ in the shape of a deposit or a parental guarantee. First time buyers – especially those without family help – already faced a significant disadvantage compared to previous generations. The disparity between wages and house prices has grown significantly; today, the average home costs 6.4 times the average wage (10.2x in London) a stark increase from 1983 when a home cost 3.4 times salary (4x in London).

As house prices remain high, and lending policy prudent, the majority have had to defer or give up on the idea of sole home ownership, instead considering shared ownership, shared equity, or resigning themselves to renting for the foreseeable future.

Arguing that rates are still historically low and mentioning ‘at least it isn’t the seventies’ –a period of high inflation, high risk of recession, and interest rates hitting 15% – is missing the point as arguably it has never been harder to be a first-time buyer.

It’s not easy for lenders, either

December 2022 saw the slowdown in annual house price growth continue, shrinking to 2.8% from 4.4% the previous month. A trend that has continued into January 2023. Consumers are continuing to face significant economic headwinds, with real earnings likely to fall further and the labour market widely projected to contract. Lenders are facing different market dynamics from 12 months ago and are having to balance often conflicting goals.

• How do they maintain or grow their market share but also avoid higher arrears and bad debts?
• How do they support customers achieve their goals whilst not encouraging them to overextend?
• How do they offer customers fair value in relation to their costs but continue to make a profit to bolster their capital base?

So, what should lenders do differently?

As the economic downturn prevails and consumers struggle to safeguard their own futures, lenders need to continue to balance their relationships with their key stakeholders – customers, investors and regulators.

Readiness for the Consumer Duty implementation date of 1st August 2023 for ‘on-sale’ products and services has placed greater emphasis on the customer and in particular avoiding foreseeable harm and delivering fair value.  

Successful lenders in the new Consumer Duty world will be those that:

• Treat the customer as a lifetime relationship, not a product sale or asset on the balance sheet.
• Recognise that a home loan is really a ‘dream maker’ and dreams need to be maintained in both the short and longer term.
• Offer struggling borrowers with options such as revised payment plans, increased mortgage terms, or by supporting them through a downsizing process will generate trust and loyalty.
• Make customers feel that they are much more than a statistic, a number, or a collection of data points on a page.

While the current economic downturn, like those downturns in the past, is being felt deeply by consumers it will be temporary. By encouraging customers to share their financial challenges at an early stage will allow lenders to be more effective in avoiding arrears and bad debts. In doing so the lenders will slow down the repayment of capital and, whilst interest payments continue to be made, positively manage profitability and bad debt provisioning.

There really is an opportunity for lenders to shift their focus from acquiring customers and lending, to customer care and retention. As the housing market is redefined in the long term, those lenders that manage to adapt, provide support, and deliver peace of mind to customers will ensure the house continues to win for their customers and themselves!

If you would like to discuss how we could help engage and communicate with your customers please don’t hesitate to get in touch with me or another member of our Consulting team.