Statistics Jersey published its quarterly Jersey House Price Index (JHPI) last week, which also laid out the annual property figures for 2022. All property types recorded their highest annual average price seen to date and the JHPI was 11% higher in 2022 than in 2021. So, what does this mean for property financing in Jersey?
The effect of the Bank of England (BoE) interest rate rises over the first half of 2022 did not immediately impact the housing market. However, Jersey’s Q4 figures show that there was ultimately a knock-on effect, which became apparent as property transaction volume slowed in the final quarter of 2022.
The turnover of properties in Q4 2022 was 40% lower than the same period in 2021 and was 27% lower than Q3 2022. Property prices rose during the first three quarters, and whilst there was a reduction to mean property prices in Q4 compared to Q3, overall, the JHPI increased by 11% compared to 2021.
It will be interesting to see how Q1 2023 figures for the Jersey property market compare to the 2022 figures for the same period. We expect that interest rates will continue to rise, although we believe we are not too far away from the peak base rate. We think this might translate to a slower start for Jersey mortgage products for 2023 in terms of pricing, although we may perhaps see some stimulus and lowering of prices closer to the end of the year.
Jersey’s interest rates continue to be influenced by the BoE base rate. Interest rates now sit at around 5-6% (usually at the top end of this scale), although rates move into the 7% range for high loan-to-value (LTV) mortgages.
For first-time buyers who are having to absorb the costs of property appreciation as well as increased rates, it remains challenging to get onto the property ladder. While affordability continues to be a challenge in the middle market, for those looking to take on larger mortgages on the basis of a solid financial background and savings, there is still plenty of lender appetite. High LTV mortgages (even up to 80-90%) are on offer for those with good liquidity, very solid financials and steady income although serviceability remains the key question to consider for anyone looking to borrow.
Overall, ten-year fixed rates can now be marginally more competitively priced than five-year fixed rates. In the UK market we have seen long-term fixed rates remain at a level similar to the BoE base rate, although fixed-term products won’t make sense for every buyer. Two-year fixed rates tend to be the most expensive of all the fixed rate products available, although depending on the buyer’s plans for the property and their view on the market, these may still be the best option, even if they are marginally more expensive.
In terms of products, tracker and variable rate mortgages offer buyers different benefits and potential drawbacks that should always be considered. However, tracker mortgages are increasingly competitive in price and more buyers are considering them. We believe this is because there is hope that the BoE base rates will peak and then reduce, and some buyers are anticipating tracker mortgages will be more cost-effective in the long-term if this happens.
The Jersey Statistics report showed that advertised prices for private sector rentals were 10% higher than in 2021. This makes sense, given the rising interest rates will have impacted landlords, who will look to pass on rising costs to tenants.
The Jersey buy-to-let mortgage market remains challenging for landlords looking to remortgage. Interest rates have risen significantly over the past 18 months, and many will now be looking at refinancing at much higher rates. This will cut into yields, especially if the mortgage was taken out with a high LTV, which many landlords will have opted to do.
While lenders have always required a margin (the gap between the rent and the mortgage amount) of anything between 125-145%, rising rental costs have meant that in many cases landlords are feeling the pinch to be able to make these margins. Top slicing is an option in these cases. Some landlords have been looking to take out mortgages from lenders that can consider additional income as a way to find comfort in lending, and that can offer lower rates in the context of a sound financial background that supports borrowing.
In a trend that has continued from last year, we’ve seen several new-build landlords considering their options in the light of increased interest rates. Several investors bought rental property off plan and as the completion of the builds were delayed, they lost their fixed-rate options connected with the LTV associated with their mortgage.
As a result, we’ve seen several cases of landlords considering if it makes sense keeping the property as a rental or selling it upon completion.
When Jersey property investors want to sell a new-build property that they had initially intended to rent out, they will need to consider how they will manage their mortgage, especially when they need to switch to new rates. Why?
Jersey new builds are typically one or two bed flats that are ideal for first-time homeowners, and many of these individuals are looking to purchase property. However, even with many buyers in the market – especially first-time homeowners, who are looking to get onto the property ladder – and with Jersey’s shortage of stock, property sales can take longer than expected. As a result, some mortgage holders will be forced to switch onto new buy-to-let mortgages while they wait for the property to sell.
We’ve seen some scenarios of bridge loans being used as a stop-gap solution in these cases. By using a bridge loan, the property investor can complete the sale of the property and then take it to market without remortgaging, with the bridge loan being repaid when the property sells.