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Steady rise in mortgage lending, arrears and repossessions

Over next two years mortgage lending will continue slowly on its upward trajectory boosted by remortgaging but
arrears and repossessions will start to hit the headlines again as interest rates rise.

Figures from the Council of Mortgage Lenders show that gross mortgage lending is set to end 2015 at 214
billion, up from 203 billion in 2014. Going forward mortgage lending should continue to rise going up to 237
billion in 2016 and 261 billion in 2017.

Improvements should also be seen in net mortgage lending which rose from 24 billion in 2014 to 27 billion in
2015. This year it is forecast to rise to 31 billion and move up further to 39 billion in 2017. The CML says this
will primarily be the result of more first-time buyers entering the market.

As far as repossessions and arrears are concerned we are likely to see a rise after six years of falling figures.
Arrears over 2.5% of the original balance reached a low of 102,000 in 2015 but are forecast to go up to 105,000
in 2016 and 115,000 in 2017 as Bank base rate is anticipated to rise. Repossessions are predicted to go up from
a 2015 low of 10,500 to 18,000 this year and 19,000 in 2017.

The Council of Mortgage Lenders is forecasting limited market growth over the next two years with housing
transactions similar to the last two years hovering at just over 1.2 million sales.

It says that the main reasons for this are high house prices relative to earnings, regulation in the homeowner
market and uncertainty around buy-to-let.

Cash transactions are likely to remain around current levels and make up just over a third of all sales.

Inflation is likely to remain below 1% until the middle of 2016 and return to the 2% target by the end of 2017,
which should give households more spending power.

The financial markets see the first Bank of England rate rise coming at the start of 2017, but the CML believes it
will be in the second half of 2016. It says house purchase activity from homeowners and an increase in
remortgage activity is likely this year.

While buy-to-let remortgaging has been strong for some time, homeowner remortgaging has picked up from a
15-year low and should continue to rise over the next two years.

The CML says that around half of the increase in gross lending over the next two years will be driven by
remortgage activity in both the residential and buy-to-let space. This is because borrowers will take advantage of
record low mortgage rates and better deals as a result of increasing house prices improving their equity positions.
Remortgage activity will also likely be boosted by rate rises when they start to occur.

The second half of 2015 saw an uplift in lending after a slowdown associated with the introduction of the
Mortgage Market Review affordability rules in April 2014, and macro-prudential interventions by the Bank of
Englands Financial Policy Committee (FPC).

From 1 October 2014, the FPC capped loan-to-income ratios so that lenders cannot have more than 15% of new
mortgages at LTI above 4.5 times income. It also introduced interest rate stress tests so over the first five years
of the loan borrowers are assessed to make sure they can afford to repay if their interest rate rose by 3% above the rate at origination.

Going forward, the government is introducing some new initiatives to promote activity in the housing market. This
includes extending the Right to Buy scheme to housing association tenants, Help to Buy ISA, Help to Buy shared
ownership and the starter homes programme.

The CML believes these initiatives will have a moderate impact on the housing market from the second half of
2016 onwards.

The Help to Buy mortgage guarantee scheme is due to close at the end of 2016 and lenders have already begun
to develop alternatives that support higher loan-to-value business.

This is likely to help offset any associated dip in activity. However, there is a possibility that some house
purchase activity is brought forward into the second half of 2016, to take advantage of the scheme before its
closure.

Buy-to-let has grown rapidly for the past five years, accounting for about 9% of all property transactions in 2015
and around 16% of mortgaged transactions.

However, the CML expects buy-to-let house purchase activity in 2016 to fall below its 2015 level, and for activity
in 2017 to fall below the level seen in 2014.

This is because of tax changes being phased in from 2017, the stamp duty increase by 3% from 1 April this year
and regulation of consumer buy-to-let from 21 March 2016. Buy-to-let remortgaging is also likely to increase.
Richard Sexton, director of e.surv chartered surveyors, commented: While the global economic recovery
continues to be fragile, the last year has seen more solid improvements in Britain. There’s a new level of
flexibility within the housing market for many homeowners, and the range of mortgage options available has
gifted existing homeowners the opportunity to chase down the best deals. A healthier lending climate in general
has been carried by the vital combination of low inflation and strong wages a scenario that many expect to
continue into the New Year.

But many first-time buyers are still feeling the chill. Whilst overall lending has risen, small-deposit lending has
stalled. It equates to just 16.3% of total house purchase approval. As house price rises continue their momentum,
many first-timers are facing an uncertain future. Lenders are increasingly happy to help first-timers with healthy
credit ratings, but there is a serious lack of entry-level homes, meaning a generation of aspiring homeowners
cant make the most of the favourable financial conditions.

John Phillips, national operations director at Just Mortgages, said: As a result of competitive mortgage rates,
strong wage growth and the governments push for homeownership, it is little surprise to see that mortgage
lending activity is continuing on an upward path.

Although affordability burdens, increasing demand and supply challenges will have an impact on mortgage
lending activity, I believe the pace of lending will continue at a steady speed into 2016 and, due to low inflation
and low mortgage rates, it is likely that lending will reach 214 billion.

Peter Rollings, CEO of Marsh & Parsons, commented: Last year wasn’t as quick out of the blocks as 2014 in
terms of mortgage lending and overall housing market activity, but is now in much finer fettle than we saw 12
months ago. A strengthening economy and favourable lending conditions means that transactions haven’t tailed
off like they did in 2014, although the seasonal slowdown in December is to be expected.

The recent measures announced by the government to build new homes and offer help to those looking to take
their first step on the property ladder are welcome gestures, but it will be some time before this intervention is
evident in the various monthly indices. The powers that be also need to be careful of artificially stimulating the
market at the bottom end while continuing to penalise those in the upper
reaches.

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