With grocery, energy, and other household prices/costs rising and hitting everyone’s back pocket, inflation (rising prices) may feel like an unimportant issue when it comes to the cost of keeping a roof over your head.
Yet nothing could be further from the truth for many homeowners and landlords.
Because inflation over the long-term is bad for the economy, the normal weapon of choice to reduce inflation is to increase interest rates. The Bank of England (BoE) is in charge of interest rates.
Should inflation continue to rise, there will come a point later in the year when the BoE will need to raise it’s Base Rate from its 300-year record low of 0.1%, and probably continue to do so with a series of further increases in 2022.
When interest rates go up, the cost of mortgages go up. When the cost of mortgages go up, that hits the affordability of what people can borrow to buy their homes (and landlords to finance their buy-to-let properties).
Could it be the end of the house price boom?
The danger of a base rate rise by the BoE on the back of a rise in inflation over the last few months has alarmed banks and building societies into increasing the mortgage rates for both home buyers and landlords.
In the last week alone, lenders have increased the rates (i.e. prices) of their mortgages, some mortgages by more than one whole percentage point. That doesn’t sound a lot until you punch the numbers into a calculator (more of that later).
Property buyers (be they landlords or homebuyers) have relished months of cut-price cheap mortgages rates.
Mortgage lenders have played the big game in the last 12/16 months to capture the mortgage business of 1 million+ Brits that have moved home since the end of Lockdown-1 plus the many millions of re-mortgages, with the cheapest mortgage rates falling below 1%.
Yet, the money markets have already priced into their calculations that the BoE will increase the base to 0.25% by December, up from the existing 0.1%. They also anticipate a further two-quarter point (i.e. 0.25%) rise in the spring of 2022, meaning they believe the base rate will be 0.75% by the end of summer 2022.
The mortgage price war the banks and building societies have been fighting recently has resulted in falls in the month-on-month average mortgage rates available to borrowers. The economy is awash with cash looking for a home (mainly down to the Government’s and BoE’s intervention to keep the UK economy going during lockdown). For those with large deposits, this has meant mortgages have been available at less than 1%.
However, with reports of a potential BoE interest rate rise happening soon, those homeowners who are on a variable rate mortgage are probably going to be the first who would feel the influence of any Base Rate increase.
What does this mean for mortgage rates?
This could mean homeowners with variable-rate mortgages would be spending half their salary on their mortgage should interest rates get up to these levels.
Now the BoE won’t increase rates by that amount overnight, as that would spook the market. They will probably increase every few months by a quarter of one percent each time.
Thankfully, over the last 4 or 5 years, over 90% of new mortgages have been fixed-rate, yet they are only fixed for a certain length of time. If you have less than one/two years left on your mortgage, you seriously need to take advice now from a qualified mortgage broker, as any penalty to change might now be considerably smaller compared to the mortgage rates you might be paying when your deal finishes in the next 12/24 months. Again, I am not giving you advice in this article – just making a suggestion.
A further message to the 1 in 5 (ish) homeowners on a variable rate – please take some advice from a qualified mortgage advisor as well. Mortgage rates can’t get any lower and all the signs are showing they will be going up. The mortgage market is still extremely competitive, there is opportunity for borrowers to lock in ultra-low mortgage rates before any likely Base Rate increases filter through.
The early 1990s saw repossessions go through the roof as homeowners defaulted on their mortgage payments because of the increased mortgage rates. Also, in the run-up to the Credit Crunch in 2008, Northern Rock was lending 125% of the value of the property (we all know what happened to them!). Other banks were recklessly lending 8 or 9 times a person’s income, without the person having to prove that income. Both scenarios were significant contributory factors in the housing market crash.
Thankfully in 2014, the BoE implemented the recommendations of its own Mortgage Market Review (MMR). The MMR forced banks and building societies to stress test mortgage borrowers against potential increases of the base rate of up to 3%. Thankfully, even the most hardened monetary doom-mongers aren’t contemplating base rates of those levels.
Fundamentally, as we go into 2022, the housing market is built on decent foundations, unlike in 2007 with the poor lending practices by the lenders. Yet the increase in base rates will have another influence.
The psychological factor of a perceived increase in mortgage costs might be enough to cool the enthusiasm and excitement of many buyers to pay top dollar for their next home, and that might not be a bad thing. If I am being frank, we could do with something that takes a bit of fizz out of the housing market.
Many homeowners have been wary of putting their houses on the market because they are scared they won’t be able to find another home. A slight increase in Base Rates will take the frothiness out of the property market and return it to some form of normality. I would even go as far as to say house prices might ease back ever so slightly in the coming 12 to 18 months.
Don’t be alarmed if house prices in do drift slightly over the coming years like they did in the mid 1990s.
It’s just the property market settling down and coming back into some form of equilibrium, which is good for everyone.
The mortgage lenders have already priced in the potential BoE rate rises, so even if rates do rise, let’s not panic. And even if they did rise to 3%, that would still leave them at levels that look exceedingly cheap at any other time in history. Many homeowners in their 50’s and 60’s can remember mortgage rates of 15% in 1992, so take advice from your family. (Interestingly, the 50-year BoE Base Rate average is 7.2%).
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