As we continue to come out of the other side of the coronavirus pandemic, the housing market has begun to settle after 18 months of unpredictability. The rise in house prices was driven by the fundamentals of supply and demand. Demand was outstripping supply across most areas of the country with many estate agents having prospective buyers in the double-digits for each property they were listing. The demand was driven by various factors. Most notably, the requirement for more space driven by the move to working from home, the stamp duty holiday and more recently, the opportunity of securing mortgages at extraordinarily low rates.
The mortgage market forms a fundamental part of the housing market and throughout the pandemic we’ve seen the impact it can have. Early on we saw mortgage rates rise. Uncertainty over how the pandemic would impact the housing market and property prices combined with reduced lender underwriting capacity caused rates across the board to rise. The former caused nearly all 95% LTV lending and the majority of 90% LTV lending to be suspended meaning those with low deposits, typically first-time buyers were unable to get on the property ladder. Early 2021 saw low deposit mortgages return with some lenders using to support of the Government Mortgage Guarantee Scheme. As we’ve continued through 2021, recent months have seen a race to the bottom from mortgage lenders across all LTVs. For those with significant relative deposits, securing rates below 1% is a realistic possibility with multiple lenders now offering these and some even dropping as low as 0.8%.
However, try not to get dragged in by the low interest rate as these aren’t always the best option…
The size of your mortgage and the length of your initial period will depend on which mortgage product is best for you. If you have a larger mortgage, a lower rate with a higher product fee will likely be the cheapest option. In contrast, if you have a smaller mortgage, a higher rate with no product fee will likely be the cheapest option for you. The mortgage product most suitable for you depends on the specific figures.
Example – Remortgaging a balance of £250k on a 2-year fixed over a 20-year term.
- A 0.99% rate with a £1,495.00 product fee has a true cost of £29,061.88
- A 1.29% rate with no product fee has a true cost of £28,141.88
Despite a 0.3% difference in interest rates in this scenario, the mortgage balance would have to be over £500k before the 0.99% product became the cheapest option over the initial 2-year fixed period. Also, not only would the mortgage need to be over £500k, but interest rates this low are usually only available with a 40% deposit or more. This means your property would need to be worth almost £850k too. You can see why these products shouldn’t be advertised as suitable for all…
Looking forward to what the future holds for the housing market, many industry commentators spurt out polarising views based on wider economic factors which does little to help reassure those concerned. In terms of the mortgage market, we expect to see little significant movement in mortgage rates over the next two to three years before rates. The Bank of England Base Rate will likely remain low as the emphasis on consumer spending to drive economic recovery remains a top priority. In terms of property prices, finding a local expert, often a well-respected estate agent, if you’re looking at buying and selling in the current market, will give you a more relevant assessment compared to looking at the national picture.