United Kingdom

Housing Finance Market Overview

In the United Kingdom, housing finance is mainly raised from banks and Building Societies. Mortgage Brokers have an important intermediation role as about 60 per cent of all mortgage transactions were processed through mortgage brokers in 2005. The housing finance market has seen a considerable boom with an increase of the mortgage debt to GDP ratio from 55.9 per cent in 2000 to 86.3 per cent in 2007.

The Market from the Perspective of the Demand Side

In the United Kingdom, the usual maximal loan-to-value (LTV) ratio amounts to 80 per cent. However, lenders were ready to lend more but, in turn, usually imposed mortgage indemnity insurance to cover their risk. Therefore, the average LTV ratio could be higher than 85 per cent in 2007. The most home loans taken out are variable rate loans though fixed interest loans are not uncommon.

House Price Development

House prices have risen considerably with an average annual growth rate of around 12 per cent from the year 2000 to the peak in the summer 2007. Yet, since then, the house prices have fallen rapidly with a decline of 27 per cent from the peak to the middle of 2009.

Refinancing Instruments

Customer deposits are still the main source of the banks for funding of the mortgage market activities, though securitisation is increasingly used as a means of raising funds, with issues of mortgage backed securities skyrocketing, contributing with a share of already 20 per cent to the total residential mortgage debt outstanding in 2007. The Covered Bonds market plays only a minor role in the United Kingdom. Due to the great importance of capital markets for the mortgage market, it has been highly dysfunctional since the start of the financial crisis and the credit crunch.