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Published: 19 March 2015 | Author: Mohammad Jamei

  • Budget measures may add a little to the feel good factor in the near term, but the Office for Budget Responsibility projections make it clear that a further period of fiscal retrenchment lies ahead.
  • Backward-looking indicators of housing activity and mortgage lending continue to describe subdued market conditions.
  • But improving prospects for earnings and last autumn’s stamp duty reforms seem likely to support a modest pick-up in activity over the coming months.


The March 2015 Budget took place against a relatively benign economic backdrop – strong economic growth, labour market gains and the near absence of inflationary pressures.

Although the Budget contained some populist announcements, it adhered to the familiar pattern set by the chancellor George Osborne of being fiscally neutral. 

The medium-term fiscal projections are improved by the sale of financial sector assets, but are not materially different from those made by the Office for Budget Responsibility at the time of the autumn statement.  The inference is that fiscal austerity is likely to characterise the next parliament, regardless of the outcome of May’s general election.

Chart 1: Public sector net borrowing, £ billions

Market commentary March 2015 fiscal

Source: Office for Budget Responsibility

The Bank of England's monetary policy committee (MPC) once again left monetary policy unchanged in March. 

UK base rates have now been on hold at 0.5% for six years, and the last quantitative easing action – a £50 billion stimulus – was nearly three years ago. The two MPC members who had been calling for interest rate increases for the time being support the status quo, helped by headline consumer price inflation posting new record lows – just 0.3% in the year to January 2015 - and expected by the Bank of England to fall to zero over the next few months.

According to the latest Treasury compilation of economic forecasts, the median expectation is that UK base rates will end the year at 0.5%, followed by modest increases over 2016.

Housing and mortgage markets

The slowdown in mortgage lending over recent months sits a little oddly, when viewed against the backdrop of an improving economy, jobs market and consumer confidence, and competitive mortgage rates. 

It also contrasts with a marked pick-up in unsecured borrowing, although much of the latter relates to car finance deals.

Chart 2: Gross and net mortgage lending, £ millions, 12-month moving totals

Market commentary March 2015 grossnet

Source: Bank of England

But with low mortgage rates limiting the incentive for existing borrowers to remortgage, mortgage lending overall is closely tied to developments in the housing market, where activity, sentiment and house price inflation has been subdued since last summer.

This, in turn, reflects a number of influences, including the unwinding of special factors that had previously powered the London property market, growing affordability pressures as house price growth in many parts of the UK outpaces that of incomes, and mortgage market review (MMR) and macro-prudential measures reinforcing prudent underwriting standards. 

The gentler pace of housing market activity levels has, over recent months, been reflected in first-time buyer numbers dipping a little and also slower take-up under the Help to Buy mortgage guarantee scheme.

Chart 3: Housing activity, 000s, seasonally adjusted

Market commentary March 2015 activity

Source: HMRC and Bank of England

According to HM Revenue & Customs, seasonally adjusted housing sales were 97,000 in January. While this represents the fourth successive monthly drop in sales and the lowest level of activity since October 2013, the underlying picture is actually one of gentle decline.

Our forward estimate is that gross mortgage lending totalled £13.4bn in February. Although this is about 9% lower than the month earlier and a year ago, this mostly reflects seasonal factors and the very strong growth in activity ahead of the implementation of MMR last April.

Short-term prospects

Looking ahead, although more than the usual degree of uncertainty surrounds the forthcoming general election outcome, a number of measures support our expectation of a modest market pick-up.

Bank of England approvals – at nearly 61,000 in January – nudged a little higher for the second month in a row, early signs of activity levelling off. 

According to the latest survey from the Royal Institution of Chartered Surveyors, new buyer interest shows signs of stabilising after seven consecutive negative net balance readings. Despite some drag, in particular from London, surveyors are generally positive about house prices and sales expectations over the coming three months. 

And elsewhere, house-builders are once again sounding optimistic, albeit in less ebullient mood than a year ago. Latest NHBC figures point to a modest pick-up in housing starts, while pipeline data recently released by the Home Builders Federation shows higher private housing unit approvals and units granted planning permission in the fourth quarter. 

Last autumn’s stamp duty reforms have been a little slow to have a positive market impact, but we expect these to combine with positive developments in the wider economy, and in particular the prospects for a recovery in real incomes this year, to re-kindle house purchase activity over the coming months. The Budget's Help to Buy ISA announcement is also likely to buoy longer-term housing sentiment and first-time buyer interest.