Current housing market Nov 2022

With the current housing and mortgage market conditions, with house prices at record highs, interest rates at their highest levels since 2008 (source: BBC) where most homeowners are experiencing higher costs and, in some circumstances, emotional and financial stress; we hope you find this article useful.

The leap to home ownership, for a First Time Buyer, is often tough with deposit requirements and passing a lenders affordability calculator with rising energy costs and the cost-of-living crisis.

However, there is potential for First Time Buyers within the next 2 – 3 years as house prices decline meaning a lower deposit and a lower borrowing amount which will help in offsetting the higher cost of borrowing.

We expect house prices to decline by up to 20%

With the housing market, like many other asset classes (energy, car, commodities, the stock market) in a bubble we expect the market to switch from what has been a ‘Seller’s’ market to a ‘Buyer’s’ market.

Landlords are questioning the commercial viability of having a portfolio as they are seeing their mortgage costs rise rapidly and in some cases the cost of the mortgage being more than the perceived rental income. Not all landlords will be able to pass this additional cost to their tenants as they simply won’t be able to afford it and landlords have also been squeezed for additional costs to get their properties up to standard to meet new legislation.

With the monthly cost of the mortgage not being tax deductible for the ‘standard landlord’, meaning the full rental amount is taxable, landlords are questioning whether the property market is still a viable investment proposition leading some to sell some of their properties.

6 months ago, estate agents may have had 20 viewings per property they were listing and would often get into a bidding war and accept offers over the asking price. In today’s market viewing numbers have reduced significantly and there is a genuine concern of ‘gazundering’ – lowering the amount that has been offered to the seller of a property, typically just before the exchange of contracts.

With these factors considered and the already softening house prices added to a nervous sentiment and lack of confidence in the economy this will add pressure to house prices. We are expecting up to a 20 per cent house price fall which will allow First Time Buyers, with the right stamp duty incentive, to consider getting on the housing ladder even with mortgage rates in their current 5 – 6 % level.

How long until we are officially in a recession?  

At the time of writing this article we are not officially in a recession, as the definition of a recession is 2 successive quarters of negative growth, however, it sure does feel like a recession and if it ‘smells like a fish, it generally is a fish!”

On the assumption that we will officially be in a recession I feel that this will be a deep and long period of financial pain for most of the country as the cost of living and the cost of mortgages / rent will increase to a level where most people simply can’t afford.

If you find yourself in this position, either as a tenant, a homeowner or a landlord the best advice that we can offer is to communicate with your mortgage provider or your landlord to see what options are available to you. Options such as payment holidays or payment plans may be available to you to alleviate some of the financial stress. It is always best to communicate any tough situation you think you will find yourself in, in advance, rather than leaving the communication until the last minute when a missed payment or default is inevitable. Remember to check and ask what, if any impact, this will have on your credit file as this could cause you issues in the future and restrict your options.

Can the government / Bank of England force lenders to reduce rates?

The Bank of England is supposed to act independently of the government so neither can force a lender to reduce mortgage rates. They can apply appropriate policy to ease inflation, which in turn would bring down borrowing costs for banks and clients, but the simple answer is ‘No’ they can’t.

 Is it realistic to assume that mortgage rates will be 5-6% as per the press?

With Inflation at its current levels, I feel that rates of 4 – 6% are the new ‘norm’ for the next 18 – 24 months. We have seen in the past few days lenders reduce their rates marginally after the initial reaction to the mini budget announced by Kwasi Kwarteng. Interest rates may fall a bit further which would be a blessing for many however the interest rates for mortgages in the 1 – 3 % range is not expected to be seen again in the short to medium term.

Will there be negative equity? 

Yes, there will be potential for some homeowners who have purchased a property in the last 24 months for the following reason:

If you purchased a home in the last 12 months with a 5% deposit, and house prices fall in the region of 10 – 20% then you would find yourself in negative equity.

Being in ‘negative equity’ will affect your financial position if you were to consider selling your home (as you would have a shortfall to find) and if you were looking to refinance your current mortgage as the options available to you will be limited or zero.

If you were not needing to sell or refinance and can ‘ride the storm’ out until such time as house prices increase again then being in negative equity will not cause any financial concern.

With my mortgage cost increasing substantially – What are my options to reduce the monthly cost?

There are many options available to you some of which are highlighted below:

• Source the best mortgage deal available – However this will most probably be a lot higher than what you have been paying. It is always best to research and look at the options available to you and make your decision based upon this.
• Look at the different types of mortgage deal available, maybe a cheaper ‘Tracker’ or ‘Variable’ deal is a consideration compared to a higher priced fixed rate? (This is a personal choice as there are pros and cons of these types of deals). Remember with these types of mortgages the amount you pay will fluctuate and therefore this needs to be factored into your decision making.
• Consider a part repayment / part interest only deal to reduce the monthly cost – This is available from some lenders however their lending criteria for an interest only mortgage has to be met which not everyone will meet unfortunately.
• Switch to an interest only mortgage – Only available as a consideration if you meet the lenders criteria. With this option you will only be paying interest on the outstanding balance owed to the lender and therefore you need to consider how you will repay this amount when your mortgage term ends. Some lenders will require you to provide proof you will have the available funds to do so.

Should I wait to buy a house?

This is a tough one to answer as it depends on your personal circumstances. For example, if you were selling and buying simultaneously it shouldn’t matter when this transaction takes place. If it happens when house prices are high, then you sell at a high price and you buy at a high price.

If you sell when house prices have fallen 20% you would also buy your new home with a 20% discount, so this equals itself out.

If my daughter, as a First Time Buyer, was looking to buy her first home then I would be advising her not to rush in, be patient as house prices should fall. Again, this is easier said than done as if you happen to find your dream home you may not want to lose it regardless of your thoughts on where house prices will end up. There is a counter argument to this statement and that is that rental prices will increase as landlords try to offset some of their higher mortgage costs and pass these on to their tenants. Therefore, in this scenario if my daughter was renting (as opposed to living at home) she would be caught between a rock and a hard place.

What are the challenges to Landlords?

Landlords face some tough challenges in this current market with rising interest rates that really affect their borrowing capabilities. An easy example of this limited borrowing capacity is shown below:

• Lenders base their borrowing on a rental ‘stress test’. In September 2022 lenders would have considered lending up to £150,000 based on £1,000 per month rent. Today’s rental ‘stress test’ based on the same rental figure would equate to approximately £120,000 borrowing – A massive decrease of £30,000 of 20% based on this example. (All lenders have different stress tests for rental income and the above example should be used as a general guide)

Based on these lending figures the deposit required to purchase a new investment property, will increase significantly, making the investment decision to consider property as a viable investment in the short term questionable.

A landlord coming to the end of an existing mortgage deal is currently seeing rates increase from a 1 – 3 % range to a 5 – 7% range making, in some circumstances, mortgage costs higher than the rental figure being received. Understandably some landlords are considering selling their portfolios or individual investment properties as the numbers are no longer stacking up. This is a tough decision for landlords as they will face Capital Gains Tax on any profits made from previous house price increases yet good news for first time buyers as new housing stock comes onto the market.

With the general market sentiment and downward pressure on house prices, this new housing stock that will inevitably come onto the market will exacerbate the pressure on house prices even further.

Help – I can no longer afford my Mortgage – What do I do?

As previously stated, the first thing to do is talk to your lender, do not simply bury your head in the sand. Most people face financial difficulties at least once in their lifetime and therefore you are not alone.

All lenders who lend on residential mortgages are authorised and regulated by the Financial Conduct Authority (FCA) and therefore must have procedures and policies in place to help customers who are vulnerable and in financial difficulties.

How do I tell my lender that I am struggling?

Ring your lender up and explain that you are facing financial difficulties and why. Make sure you have key documents with you when speaking to them so you can give them honest and accurate information. The Lender will need to understand your circumstances so having things to hand like payslips, bank statements, details of any other debts you may have and a list of your monthly outgoings is a good idea.

What is the process?

Each and every lender will have different policies and procedures to help customers who are experiencing financial difficulty.

Once you have made contact with your lender, they will go through with you the potential options they are able to give you. It is important at this point that you take time to consider these options and ask as many questions as you need to. Make a note of the time(s) you called and the conversations had with the telephone representative. If you are confused, you can simply ask for them to provide the detail in writing to you and therefore this gives you further time to look at and consider what option is best for you.

Some lenders will offer payments holidays, some will offer to extend the term of your mortgage and may even give you a grace period. All these options come with pros and cons such as paying additional interest or potentially higher repayments in the future.

Again, remember to check and ask what, if any, impact this will have on your credit file as this could cause you issues in future and restrict your options.

What if I want to borrow more on my Mortgage?

If you wish to borrow more money on your mortgage, please be aware there is a very high chance you will not be offered this on your existing rate. Maybe this is not the right time to borrow, ask yourself honestly if you really need too. As previously stated, rates are higher now so you may wish to look at alternatives such as a personal loan, low interest or 0% credit card or borrowing from family and friends. As with everything also research and consider all your options before making a decision.

As always, our team at The Mortgage Broker Ltd will be happy to offer guidance and quotes for new mortgage deals where appropriate.

Darren Pescod

Founder – The Mortgage Broker Ltd