Year: 2022

New sales activity in the housing market is holding up in the last week. High mortgage rates do not hit all buyers equally and I remain hopeful that borrowing costs will be lower as we start 2023.

 Key Takeaways

• It’s early days, but I remain optimistic that mortgage rates will be lower as we start 2023
• There are minimal chances of negative equity after strong post-pandemic price growth
• Sales are still being agreed in the last 2 weeks as those keen to move and with cheap mortgages in place continue with sales
• Higher mortgage rates do not hit everyone: 30% of sales are with cash and a further 20% are with smaller-sized mortgages
• For now, it’s like Christmas has come early for the housing market with lower activity from new buyers in the aftermath of the mini-budget.

1. I’m Hopeful Mortgage Rates Will Start To Fall Back Soon

This week’s reversal of tax cuts announced in the mini budget seems to have calmed the markets. Borrowing costs are starting to fall for government debt and the all-important interest rates that set the cost of a fixed-rate mortgage.

Mortgage rates for new borrowers remain over 6% but I believe there are very early signs that this could start to fall back further in the weeks ahead.

This is important as the outlook for the UK housing market next year really hinges on the level of mortgage rates for buyers entering the market from January 2023 onwards.

Our analysis has always suggested that mortgage rates of 4% were manageable for most buyers. Rates reaching 5% or higher would be more of a tipping point with the likelihood of some localised price falls and fewer sales.

Looking ahead, what really matters now is the outlook for inflation – in particular, how much more central banks need to increase the Bank Rate to bring inflation under control in the UK. We will know more in the next 2 weeks.

As soon as we get signs that inflation is starting to peak, the financial markets should start to take a very different outlook on borrowing costs. This will start to reduce the cost of 5-year mortgage rates which account for more than 60% of all new loans.

It’s early days, but I remain optimistic that mortgage rates will be lower than they currently are as we enter 2023.

However, home buyers need to realise that sub-2% mortgage rates are a thing of the past, enabled by cheap money over the last decade. 4% is likely to be the new normal for mortgage rates.

2. There Are Minimal Chances Of Negative Equity

Strong UK-wide house price growth over the pandemic has added to the equity buffer for homeowners. New borrowers have not relied on large mortgages to pay more for homes.

There is a huge equity buffer to absorb any reductions in sale price, and this will allow for the hit to buying power for new home buyers.

Find out how much your home is worth

We calculate that a nationwide 15% reduction in house prices from today’s levels would result in very few cases of negative equity for mortgaged sales up to the end of 2021.

This highlights how the UK housing market has become increasingly equity driven and is much less dependent on high loan-to-value (LTV) borrowing over 90%.

3. New sales are still being agreed despite uncertainty

 Looking back over the last week’s activity from homebuyers on Zoopla, we see that interest from new buyers continues to weaken – it’s down a further 8%. Those who haven’t managed to arrange cheaper mortgages are stepping back from the market, creating a sense that the Christmas seasonal slowdown has started early.

However, sellers and buyers continue to agree new sales across the UK. The rate at which new sales are being agreed is slowing – down 25% on this time last year – but sales have not stalled. This shows that there are committed buyers in the market who want to press on and secure a sale.

Mortgage rates are important for many buyers, but life-related decisions and other pressures will continue to bring a flow of buyers and sellers into the market. However, this is and will be at a slower pace than earlier in 2022.

4. 30% Of Sales Are Cash Buyers

Higher mortgage rates are deterring buyers who need a large mortgage to buy a home. But not everyone needs a large mortgage.

3 in every 10 home sales in the UK were paid for in cash last year. A further 20% of buyers use smaller-sized mortgages, and the increase in borrowing costs will be much smaller and less of a disincentive to move for them.

Cash buyers account for almost 40% of sales in the South West. But in London where prices are highest, less than 1 in 5 sales are paid for without a mortgage.

We have seen the proportion of cash buyers increase over the pandemic with more moves by older homeowners and those who have paid off their mortgage. Over half of all homeowners don’t have a mortgage at all.

However, most people buying a home do rely on a mortgage so the increase in rates is important for the UK housing market outlook.

By Richard Donnell of Zoopla

October 2022

As inflation keeps rising, we look at what a 3%, 5% or 7% base rate would mean for homeowners and buyers.

• Base rate has increased from 0.1% in December to 1.75% now
• Even modest further rises will be a shock to borrowers who are used to low costs
• Rises come amid a turbulent backdrop of sharply rising food and energy prices

Earlier this month the Bank of England increased its base interest rate by 0.5 per cent – the biggest single increase in 27 years.

It is the latest in a string of rises. The base rate has risen from 0.1 per cent in December to 1.75 per cent now, and the Bank’s Monetary Policy Committee has signalled it is willing to go further.

In its latest report the Bank predicted that inflation, more specifically the consumer price index, will soar to 13.3 per cent by the end of the year.

Mortgage rates have been going up due to the rising base rate, amid a backdrop of soaring energy bills and food prices. Since January 2022, interest on a typical two-year fixed mortgage has jumped from 1.3 per cent to 3.46 per cent, according to analysis from L&C Mortgages, increasing average monthly payments by around £159.

Understandably, borrowers are keen to understand how much further they might go. Part of the answer may lie in the ongoing Conservative leadership campaign being played out in the background.

As the two candidates, former Chancellor Rishi Sunak MP and current Foreign Secretary Liz Truss MP battle it out to win over the Tory membership, the impact of their economic policies on people’s finances has been a topic of debate among experts.

Some say that the tax cuts proposed by Truss would lead to a base rate as high as 7 per cent. While a base rate that high might seem unthinkable to younger borrowers, there is a historical precedent. UK interest rates have averaged 7.15 per cent between 1971 and 2022, reaching an all-time high of 17 percent in November 1979.

Capitalising on this, Sunak’s campaign has created an online tool to calculate how much a 5 per cent base rate would increase the interest on people’s mortgages.

What would happen to the base rate under a Rishi Sunak premiership is less clear

Some say that Liz Truss’s tax cuts could hike the base rate to 7%, while what would happen to the base rate under a Rishi Sunak premiership is less clear

The Situation Today

Over the past few months the market has been quick to react to the rising base rate, with mortgage rates increasing even before the central bank’s announcements.

This is a problem for mortgage holders, says mortgage broker L&C’s David Hollingsworth. Borrowers have become accustomed to low rates and those who are coming to the end of a fixed deal will be in for a payment shock which will cause ‘some pain’.

Anyone on a tracker mortgage will automatically see their rate increase by the same amount as the base rate rises, while those on standard variable rates are also very likely to see costs rise.

However, 76 per cent of borrowers are on a fixed rate – and so the pain from higher rates will filter through to borrowers quite slowly as their deals come to an end and they remortgage.

Impact of a rise to 3 per cent 

The average two or five-year fixed rate currently stands at around 3.5 per cent.  Assuming that rates rises are broadly reflected in fixed mortgages, then that could mean an average of 4.75 per cent if the base level rose to 3 per cent.

Looking at SVRs, the current standard rate at Lloyds, to take on example, is sitting at 5.24 per cent after the most recent 0.50 per cent increase.

If an increase to 3 per cent was directly reflected in SVR, then that would mean a rate of 6.49 per cent. However, Hollingsworth says that this is a too simplistic view.

‘Even the increases in SVR could become more measured if base rate was to rise so substantially,’ he says.

‘When base rate was mid-5 per cent in 2007, the SVRs were not that high and often operated around 2 per cent higher than base rate.’

A £150,000 mortgage at 5.24 per cent over 25 years would cost £897.99 per month. At 6.49 per cent the price rises to £1011.87 – an extra £112.88 a month.

A bump in the base rate, even to 3 per cent, would have a significant impact on the housing market according to Raymond Boulger, senior mortgage technical manager at broker John Charcol.

‘Based on current market expectations of bank rate peaking at 2.5-3 per cent, I think that house prices will fall modestly next year, by about 5 per cent,’ he says.

‘But if the bank rate was to increase beyond 3 per cent, I would expect a greater fall. That would indicate inflation remaining high for longer than currently expected, with all the impact that would have on cost of living pressures.’

Impact of rate rises to 5 per cent and further

At 5 per cent, mortgage experts say that the market would begin to see significant stress.

According to L&C’s calculations, a rise in the base rate to this level would see SVRs climbing to 8.49 per cent, or £1206.83 a month on a £150,000 mortgage –  increase of £308.84 on today’s levels.

‘An increase to a 5 per cent bank rate would make life very difficult for many borrowers when their fixed rates end’, says Boulger.

‘Many would not pass the affordability test to remortgage, but they would still be able to get a new deal from their lender with a product transfer.’

At 5 per cent, monthly payments on a £250,000, 30-year repayment mortgage would be £1,462.

The effect of a 7 per cent base rate on the market would be profound, says Boulger – and that is before the rising cost of food and bills is factored in.

‘Homes which are still affordable for many people at current mortgage rates of between 3 per cent and 4 per cent would become unaffordable and a combination of less buyers and forced sellers who couldn’t afford the new higher rates when their fixed rate finished would result in a large fall in house prices.’

The last major fall in prices was between the autumn of 2007 and the spring of 2009, when prices fell by 20 per cent. If bank rates rose to 7 per cent, Boulger says the UK could see a similar drop in prices of up to 25 per cent.

What about the affordability stress test?

In theory, most people with a mortgage should be able to afford a 7 per cent mortgage rate as they would have been stress tested at around that level when they took out the mortgage. Last month the Bank of England called time on its mandatory mortgage affordability test – but most experts expect lenders to continue stress testing borrowers’ finances to similar levels.

However, broker Oli Pearce of Guild Mortgage Services says that calculation would not have accounted for the huge inflation concerns that are hitting households at the moment.

‘Although technically people are able to afford the borrowing level, they may not be able to actually afford the monthly payments,’ he says.

Pearce also mentions the impact rate rises will have on the rental market. Increasing interest rates increase costs for private landlords, he says, and that will be reflected in tenants’ rents.

‘The alternative is for landlords to start selling their stock off and reduce the availability of rental property further,’ he adds.

‘Landlords are already having to bear the brunt of improving energy efficiency in a property [to meet proposed regulations], changes in taxation and now potentially soaring mortgage costs, so tenants are likely to see their rental payments increase if it goes much higher.’

Best mortgage rates and how to find them

Mortgage rates have risen substantially as the Bank of England’s base rate has climbed rapidly.

If you are looking to buy your first home, move or remortgage, it’s important to get good independent mortgage advice from a broker who can help you find the best deal.

At Concise, we will help you through the process step by step working out how much you can borrow, how much it will cost, and what type of mortgage may be most suitable for you. We will even take care of all the paperwork for you, so you don’t need to worry about a thing.

By Fran Ivens For thisismoney.co.uk

Published: 09:31, 16 August 2022 | Updated: 10:20, 16 August 2022

Interest rates have been raised from 0.5% to 0.75% – their highest level since March 2020.

The Bank of England announced its decision a day after US interest rates were raised for the for the first time since 2018.

Why are interest rates going up?

Adjusting interest rates is one of the many ways the Bank tries to manage the UK economy.

Sine the global financial crisis of 2008, UK interest rates have been at historically low levels. In March 2020 the rate was just 0.1%.

The aim was to encourage firms and individuals to borrow or spend money – to get the economy moving.

But there is a balancing act to perform. The Bank wants to encourage spending and growth, but also to make sure that this does not lead to rising prices.

Raising interest rates – to encourage people and firms to borrow and spend less, or to save money – is one of the tools it uses to limit inflation.

Prices are now rising quickly in the UK and around the world, as Covid restrictions ease and consumers spend more.

But many firms are having problems getting enough goods to sell. And with more buyers chasing too few goods, prices have risen.

There has also been a very sharp rise in oil and gas costs – a problem made worse by Russia’s invasion of Ukraine.

Many economists expect inflation to reach 7% this year, which would be its highest level since March 1992.

 

 

How high could interest rates go?

Few had been expecting UK interest rates to top 1.25% this year.

But the Office for Budgetary Responsibility (OBR) – the government’s independent economic advisor – looked at the impact of higher and more persistent inflation.

This can happen if people think price rises will continue. Businesses could raise prices to keep making a profit and workers could demand wage increases to maintain living standards.

The OBR has suggested that if this occurs interest rates could reach 3.5%.

How do interest rates affect me?

If interest rates rise, it can make borrowing more expensive – especially for homeowners with mortgages.

Bank of England interest rates also influences the interest charged on other forms of credit, such as credit cards, bank loans and car loans.

So even if you don’t have a mortgage, changes in interest rates could still affect you.

Bank of England decisions also affect the interest rates people earn on their savings.

Individual banks usually pass on any interest rate rises to their savers – giving them a higher return on their money.

How does the Bank of England set interest rates?

Interest rates are decided by a team of nine economists, the Monetary Policy Committee.

They meet eight times a year – roughly once every six weeks – to look at how the economy is performing.

Their decisions are always published at 12:00 on a Thursday.

By Ben King
Business reporter, BBC News, 17^th March 2022