Editor's Message: Forget about home prices, it's the mortgage market to watch

Editor’s Message: Forget about home prices, it’s the mortgage market to watch

“Is now a good time to buy a house?” It is one of our most read articles. As a property-obsessed nation, we all want to know when we should try to stand that elusive first class, move on to something bigger or downsize and take advantage of it.

As the cost of living crisis rages on, the housing market is expected to cool down as interest rates rise.

While there’s good news for potential buyers, there’s another side to the coin: the mortgage you need to buy that dream home (unless you’re a cash buyer, of course).

Lenders have pulled deals recently and in the past month the number of available mortgage deals has shrunk from 4,417 to 3,900. That’s a 12% drop, according to the latest numbers from Moneyfacts, the financial data provider.

Interest rates have also risen across all loan-to-value (LTV) bands and are likely to rise further this week when the BoE’s Monetary Policy Committee meets on Thursday. Most bets are up 0.5 percentage point. If that happens, the base rate will rise to 2.25%, its highest level since November 2008. [Editor’s note, 12.40pm 22 September: Interest rates have been increased to 2.25%]

We’ve gone from very low to average in no time. On Monday, the cheapest two-year fixed rate was 3.79% (80% LTV), but last January you could still find a two-year fix for less than 1%.

Translating that into pounds and pence, at the start of the year it would have cost you £1,130 a month to get a 1% mortgage if you had borrowed £300,000 over 25 years. Now you’ll pay £1,549 a month, another £419.

I was touched by this: We are a family of four, bursting at the seams in our house and at the beginning of 2022 our plan was to move to a bigger place.

But not only is the housing market getting hotter, with interest rates rising, the mortgage we once thought we could afford is now a pipe dream.

The problem facing mortgage holders

Anyone who got their mortgage two years ago will enjoy some of the lowest mortgage rates on record.

Someone who took out a two-year fixed rate mortgage at the beginning of September 2020 may be able to secure a rate of 1.14% (on 60% LTV).

On a £150,000 mortgage over 25 years that would have been equivalent to £575 a month.

Now with a best 2-year fixed mortgage of 3.79% (80% LTV), that equates to £774 a month.

So not only do homeowners feel the pinch of rising food and energy bills, they also need to find extra money once their existing mortgage contract expires.

And even if you can take the hit, the lender may not agree with you.

With the rising cost of living, you will feed on the lender’s affordability checks, which look not only at income but also at your expenses.

According to broker London & Country, many lenders use Office National Statistics data when they do their affordability calculations. This means that things like rising food prices and ballooning fuel bills will start to put pressure on what people can borrow.

So what can you do?

If you have six months or less left on your current mortgage deal, you can lock in a new rate now so you’re ready to trade it in when it’s over. This is because many lender offers are valid for up to six months, which gives you the option to start the process early and avoid any further rate increases in the meantime.

Although if you want to leave your current position early, you may incur significant exit penalties.

Traditionally, the general advice here has been to avoid it at all costs. But with prices increasing so quickly, one of the brokers I spoke to told me he’s had clients calling to say they’d be happy to pay the early exit fee in order to fix the price now.

If you want to consider doing this, you will need to weigh the potential interest rate savings against any early exit fees.

Talk to your mortgage lender or broker about your options before making a commitment.

Looking to buy? Tread carefully (but watch out for stamp bunnies)

Keep a close eye on mortgage rates. You may have made your calculations thinking that you could afford to borrow a certain amount. But with the rapid disappearance of interest rates, what seems perfectly possible today may not work tomorrow.

And here’s the problem: The quick shift in prices makes you feel like you’re shopping in the middle lane of Lidl, and not embarking on one of the biggest financial transactions of your life.

The panic mood certainly does not give way to logical and rational thinking.

So, if you’re like me and want to buy—instead of dreaming about that big kitchen with a shiny new worktop—do your numbers, then do it over and over.

And if in doubt, stay tuned. It’s going to be a tough financial winter, and the last thing you want is to find yourself filled to the brim.

Finally, keep a close eye on the mini budget later this week as there may be a duty bunny to pull out of the hat.

Joanna Noble

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