This week has seen the majority of mainstream UK mortgage lenders increase interest rates on mortgage products for those buying, remortgaging and rate switching. While this is just a continuation of the trend seen over the last couple of months, it has been heightened by fresh economic reports. These point towards a slowdown in the housing market and larger and faster interest rate rises than previously predicted.
Across our social media platforms and weekly blogs, we’ve made a lot of noise about mortgage rate rises. The goal of this is not to piggyback on the trend of running a scare-mongering campaign; the goal is to secure people the best possible mortgage product, as soon as possible, to save people money on their monthly mortgage payments. So, how will the ongoing changes in the mortgage market affect consumers, whether current or prospective homeowners?
The first impact will be mortgage affordability. Mortgage affordability refers to how much a mortgage lender, a bank or building society, is happy to lend to you. This is different between each lender as each uses a different calculation model. Rising interest rates will likely affect ‘stress testing’ in the affordability calculation. Stress testing judges whether the mortgage will remain affordable in the event of circumstantial changes and further interest rises. Reduced mortgage affordability could cause a pullback on house prices If people cannot borrow as much, there will be fewer buyers available.
The second impact will be monthly payments. Rising mortgage rates mean the associated monthly payments will also increase. For those currently on a fixed rate mortgage product, this won’t affect you. However, for first time buyers, those looking at a new property or those coming up to a remortgage, interest rates are rising and the associated payments are increasing week on week. We can point to two direct effects this may have. For one, people may need to take their mortgage over a longer term (a greater number of years) in order to make the monthly payments more affordable. And two, people may have to reduce their house budget, so they have a smaller mortgage and therefore more affordable monthly payments.
Mortgage offers are generally valid for 6 months which is why we recommend getting in touch at least 6 months before your current fixed rate or alternative mortgage product ends. If you’re unsure of this date, you can usually find it on the mortgage offer document or contact your existing lender if you’re still unsure. With the cost of living rising, paying a higher amount than necessary on your mortgage is something to be avoided where possible!
House price inflation (HPI) currently stands at 10.8% as per December 2021 and despite the ‘doom and gloom’, there is scope for optimism for first time buyers. For many years now, low interest rates have meant cheap borrowing on mortgages and other financial products. This increases consumer spending, therefore facilitating rising house prices. The impacts of COVID-19 and the stamp duty holiday caused this increase to become exponential. Theoretically, by increasing interest rates, mortgage borrowing becomes more expensive, demand for borrowing drops and HPI is curbed. This should bring house prices down a little or, at least, cause them to remain level for a period. First time buyers, you may be able to get on the property ladder without cancelling your Netflix subscription and abstaining from coffee after all…
As always, whether you’re a first-time buyer, moving home, looking to remortgage or you’re a BTL landlord, if you’re concerned about interest rate rises or have any other mortgage or life insurance queries, please feel free to get in touch.