Coming onto what is – hopefully – the last lap of the Covid pandemic and considering all the changes the past two years has wrought on society, the economy and the way we are governed, Mortgage Strategy thought it an apt time to ask a number of lenders what risks they have their eyes on as 2022 starts up.

Supply and demand – By far the most common reply was the imbalance in then number of people wanting to buy a property and the number available. “The government has a target of 300,000 new homes each year,” says Glenhawk managing director Nick Hilton, “but many think this target will not be met until at least 2028.”

Accord Mortgages senior manager for new propositions Nicola Alvarez says: “We’re keeping an eye on supply and demand in the housing market – we know there’s a sustained imbalance here – but that increases the challenges purchasers face, and if the last couple of years are anything to go by, could push house prices up even further, albeit at an expected slower rate.”

Interest rate risk – At the time of writing, inflation doesn’t appear to be going away any time soon, and many believe the recent upward revisions of the base rate are only the first of many.

Hilton comments: “Interest rates will need to rise to keep pace with the increased cost of goods and services. This will force lenders to increase rates in 2022 in both the specialist and banking lending sectors. Combined with the rate rises, lenders will need to be aware of these changes to stay competitive in their market.”

And MT Finance director Joshua Elash says that inflation is, “the single largest risk facing the broader economy.”

He explains: “Whether rates rise now or not, they will have to rise to combat the very tangible impact inflation is already having.

“Unprecedented levels of liquidity have been pumped into the economy by the chancellor in response to the pandemic. That, following roughly 12 years of quantitative easing, coupled with record low interest rates and labour shortages off the back of Brexit, have created the perfect environment for inflation; and its very real.”

Elash continues: “With commodity prices and labour costs increasing significantly, development and heavy refurbishment projects will be put to the test with profit margins contracting. There is a real risk that projects either stall or are abandoned.

“For lenders who have development exposure at the higher LTV end of that market, there is a tangible risk of an increase in forfeitures on unfinished projects, where negative equity positions will be borne out. Unless inflation is brought firmly under control, this could lead to the failure of one or more lenders specialising in that space.

“Equally, the medicine is not without pain, as the inevitable increase in the base rate will challenge the average UK household, which has become accustomed to a decade of record low interest rates and cheap credit.”

Paragon Bank managing director Richard Rowntree adds: “When combined with increased energy and property costs, an increase in interest rates will further increase landlords’ overheads, placing additional pressure on rents already inflated due to reduced stock, and limit the ability for renters to save for mortgage deposits.”

Energy efficiency regulation – In the buy-to-let market, lenders are watching proposals to ensure that all rented property have an energy efficiency rating of ‘C’ for new tenancies in the next few years and for all tenancies following that.

OSB group engagement director Roger Morris says: “The secretary of state has announced that they will be amending the energy efficiency regulations 2015 and we are all waiting to hear what the final outcome will be, though it’s expected to come into play in 2026.

“This information needs to be relayed to and considered by both brokers and landlords, especially if they are looking to purchase or re-mortgage and want to lock into a five-year fix product.

“The landlord needs to be made aware of these impending legislative changes, or they could be stuck with a property that needs further improvements that haven’t been accounted for or considered. In the worst case scenario, the property may be financially unviable and the only solution could be to sell the property which would then bring early repayment charges into play.”

Rowntree says: “Although an issue we raised some time ago, the proposed changes to energy performance certificate requirements is rising up the agenda due to the time and funds that will be required for landlords to upgrade the approx. 3.2m PRS properties currently rated below EPC C, ahead of the anticipated 2025 deadline.”

Affordability – “Lenders are grappling with affordability calculations with a market wide consideration to increase income multiplications or overall affordability,” explains Morris.

“This, coupled with the negative impact on household bills because of the impending increase in energy costs and inflation affecting household bills and the wider economy, means that there is a careful balance to be maintained.

“If this wasn’t enough to contend with, there is also the potential of three base rate changes, so this will certainly be an area of focus for all lenders this year.”

And Alvarez brings in another angle: “With the end of the Help to Buy scheme next year impacting transactions from this summer, there’s a risk that without a direct replacement scheme and alternative schemes not fully in place, that there will be a real gap in the market for first-time buyers.

“The challenges with affordability and raising enough for a deposit remain for many, so it’s important the industry works together to find alternative solutions.”