Topic 1: Property & Mortgage Markets Flashcards
(24 cards)
Recession
Definition
- A decline in a country’s economic activity
- usually defined as a decline in the country’s gross domestic product for two consecutive quarters.
Securitisation
Definition
- Where a mortgage lender sells off mortgage contracts to a third party, in order to free up capital for further lending and investment
- The third party is usually an SPV (Special Purpose Vehicle), which issues the securities to investors, rather than simply buying the contracts for its own use.
- The buyer receives all of the capital and interest due, but also all of the risk
Sonia
Definition
Sterling Overnight Index Average is the average interest rate banks pay to borrow sterling overnight on an unsecured basis, published daily by the Bank of England.
Sonia has been the primary interest rate benchmark for sterling markets since the end of 2021.
✔ Risk-free rate: Based on actual market transactions, not estimates, and does not include a credit risk premium.
✔ Backward-looking: Calculated using actual past transaction data (unlike forward-looking rates like LIBOR).
✔ Used in: Pricing of loans, derivatives, and bonds — especially since the discontinuation of GBP LIBOR (Since 2021).
✔ Published: Every London business day at 9 a.m. by the Bank of England.
Monetary policy
Definition
The process by which a central bank controls interest rates and money supply to influence economic activity, inflation, and employment.
Fiscal policy
Definition
Government use of taxation and spending to influence economic activity, growth, and inflation.
* Borrowing & lending is a key component of Fiscal policy
Inflation
Definition
The decrease in the spending power of money over a specified period of time, usually 12 months, as measured by the Consumer Prices Index.
* Or, RPI - which includes mortgage rates and payments in the index.
Negative equity
Definition
A situation where the market value of a property falls below the total value of all loans secured on it.
Second (or subsequent) charge
Definition
A second charge mortgage is a secured loan that is taken out on a property that already has a mortgage on it. It is called a “second charge” because the original mortgage lender has first claim on the property if it’s repossessed and sold.
Bridging Loan
Definition
A temporary loan secured on property to enable a borrower to buy another property before they have sold an existing property.
Centralised lender
Specialist mortgage provider that obtains mortgage funds from the wholesale market and operates through intermediaries.
- Centralised lenders often offer niche or specialist mortgage products (e.g. for adverse credit or self-employed).
- Applications go through brokers, so clients can’t access them directly.
- These lenders may offer more flexible underwriting but possibly at higher interest rates or with additional criteria.
The Credit Crunch
A sharp reduction in the availability of credit due to a loss of confidence in the financial system, often triggered by rising defaults and falling asset values — most notably during the 2007–08 financial crisis.
How did the credit crunch affect the mortgage market?
- Mortgage demand in the UK stalled from early 2008 and stayed low for years.
- Riskier lending (sub-prime) and relaxed criteria led to more defaults.
- Securitisation spread mortgage risks globally, worsening the crisis.
- Banks became reluctant to lend, tightening mortgage availability.
- Northern Rock’s liquidity crisis led to government intervention and nationalisation.
- Increased regulation was introduced to prevent future crises.
What caused the recent decline in UK property market growth?
- Stamp Duty Holiday (2020–21): Boosted demand temporarily; prices surged, then flattened as the tax break ended.
- Rising Interest Rates (2022–23): Bank of England raised rates to tackle inflation → higher mortgage costs → reduced affordability → demand fell.
- Late 2023 Onwards: Rates stabilised; small regional price increases returned amid expectations of future rate cuts.
How has the government tried to help first-time buyers in recent years?
- SDLT exemption threshold for first time buyers (thought this has recently been reduced as of April 2025)
- Made Buy-to-let investments less attractive (investors likely to pay more tax due to July 2015 summer budget)
- Planning rules requiring affordable housing to be included in new developments.
What 6 factors affect the mortgage market?
- Interest rates
- Non-property funding
- Inflation
- The economy
- Government Action
- Supply & Demand
Interest rates
Factors that affect the mortgage market
6 aspects
Mortgage Repayments
* High rates→ repayments rise → buyers struggle → prices fall.
* Low rates→ repayments cheaper → borrowing increases → prices rise.
Tracker Mortgages
* Follow Bank of England base rate or interbank rate.
* Past: trackers near or below base rate.
* Now: wider margins (e.g. +3% above base rate).
Government Borrowing
* More borrowing = upward pressure on interest rates.
* High public borrowing can drive rates up to manage inflation
Individual Borrowing
* Too much borrowing → more money in economy → inflation risk.
* Rates may rise to control overheating.
Monetary Policy
* Bank of England adjusts rates to manage inflation and economic growth.
* Rising rates = cooling the economy; falling rates = stimulating it.
Exchange Rates
* Higher UK rates attract foreign investors → stronger pound.
* Strong pound = UK exports more expensive, harming some industries.
*
Inflation
Affecting the mortgage market - two elements to inflation
- General inflation - the decrease in spending power of money over a period of time
- House-price inflation - Increases in house price over a period. In general, this runs ahead of general inflation.
High inflation -> increased interest rates -> more expensive borrowing -> depressed house prices.
The economy
Factors that affect the mortgage market
- Strong economy: High employment + low interest rates → more mortgage demand.
- Weak economy/recession: Job insecurity + higher unemployment → reduced borrowing.
- Pre-mid-2022: Low inflation + interest rates → favorable mortgage conditions.
- Post-2007–09 crisis: Consumer caution due to debt, job fears, market volatility.
- Since 2022: Inflation + interest rate hikes + cost-of-living crisis → lower confidence, less borrowing.
Supply & Demand
Factors that affect the mortgage market
Supply & Demand Rule:
* High demand + low supply → prices rise.
* Low demand + high supply → prices fall.
Location Impact:
* London & South: Higher prices due to population density + housing shortage.
Government Action
Factors that affect the mortgage market
Example:
BTL Tax Changes: Investors now face higher tax bills.
Government Aim:
- Reduce BTL demand.
- Ease pressure on house prices.
- Help first-time buyers access the market.
Non-property funding
Factors that affect the mortgage market
Borrowing for purposes other than property purchase
- Expanded Use: Mortgages increasingly used for non-property purposes (e.g., debt consolidation).
- Benefits: Lower rates + longer terms than other credit options.
- Financial Planning: Sophisticated borrowers spread costs to ease impact on income.
- Seasonal Trend: Early year sees rise in second mortgages post-festive overspending.
- Equity Release: Rising property values lead to borrowing against home equity to access cash.
Capital adequacy
A measure of a financial institution’s ability to withstand losses, showing it has enough capital to meet its obligations and absorb unexpected losses.
Prime & Sub prime lending.
PRIME LENDING
Lending to borrowers who meet the lender’s standard criteria and present a normal risk.
SUB‑PRIME LENDING
Lending to borrowers who represent a higher risk than normal.
What is a mortgage packager?
- Role: Middlemen between lenders and intermediaries/customers.
- Function: Handle admin, tailor mortgages, specialise in areas (e.g., BTL).
- Benefit to Lenders: Outsource distribution/processing while focusing on funding.
- Earnings: Charge 1–2% (may share with intermediaries).
- Advantage: Expert knowledge helps match applications to lender criteria.
