Understanding the dynamics of falling house prices and rising interest rates is crucial for both current mortgage holders and aspiring homeowners. This article explores the implications of these factors on financial stability and housing prospects, and how those applying for a mortgage or thinking of remortgaging can better prepare with a reliable mortgage adviser.
UK house prices are falling
Following a rapid increase at the outset of the pandemic until 2022, house prices have now begun to decline. The current housing price indices of two of the UK's largest lenders for September 2023 point to a common trend: property prices are taking a nosedive.
The fall in house prices is attributed to:
Prospective homebuyers tend to delay their purchasing decisions (or the so-called "summer slump"), leading to a temporary decrease in the number of homes bought and sold. This trend is not unique to the UK and can be observed in many property markets around the world, where the summer season often sees a dip in real estate activity before picking up again in the autumn.
The impact of the time lag in how increases in interest rates affect the housing market. The rise in mortgage costs in the previous months is now beginning to have a more significant impact on the property market.
First-time buyers (FTBs) tend to search for opportunities in less expensive neighbourhoods, allowing them to balance out the burden of high mortgage expenses.
Will there be a housing market crash? Economists find it is less likely to happen for now considering that the wages grew by 8.5% in the May-July period, according to the August labour market report.
CPI inflation, on the other hand, has fallen to 6.8%, indicating a slower rise in consumer prices compared to a much faster surge in wages. This will help borrowers adjust to higher interest rates.
What are the pros and cons of lower house prices?
Cheaper house prices make homeownership more accessible to buyers who qualify for a mortgage. In 2009, for instance, an uptick in first-time buyer (FTB) activity was observed because houses on the market were on the cheap. However, the majority of these FTBs have received financial assistance from their parents to afford a mortgage.
On one hand, current homeowners may see the value of their homes decrease, potentially limiting their ability to sell or refinance. The reduction in equity (the difference between the property's current market value and the outstanding balance on the mortgage) directly impacts their financial position.
In addition, the reduction in home values can limit homeowners' ability to sell the property, especially if they owe more on the mortgage than the home is currently worth or what is commonly known as being in Negative Equity..
Selling a home in this condition may not cover the outstanding mortgage balance. This can deter homeowners from putting their properties on the market, particularly if they cannot afford to cover the difference.
The BoE interest rate continues to rise
The Bank of England (BoE) has raised the interest rate for the 14th consecutive month to 5.25% in August before ending its run in the following month. In turn, it has pushed mortgage costs to move in the same direction, making it increasingly challenging for many individuals and families to afford the monthly mortgage payments required to purchase a home.
The BoE raises interest rates as a form of monetary policy to keep inflation within its target range of 2%. When inflation rises above its target, it can erode the purchasing power of money and destabilise the economy.
By doing so, the BoE can reduce consumer and business spending, which can help lower inflationary pressures. Higher interest rates make borrowing more expensive, leading to decreased consumer purchases and, in turn, moderating inflation.
What are the pros and cons of higher interest rates?
Higher interest rates mean that those who keep their money in savings accounts can expect to earn more on their bank deposits.
In addition, investors can better diversify their portfolios. When rates rise, they may consider rebalancing their portfolios to maintain a diversified mix of assets that aligns with their financial goals and risk tolerance. Some investors may opt for higher-yielding fixed-income investments, while others may explore alternative assets to capture potential returns.
However, first-time homebuyers with limited financial resources will continue to struggle to climb the property ladder. For existing homeowners with fixed-rate mortgages, the situation is also concerning. When a fixed-rate mortgage term ends, homeowners often have the option to remortgage, either with the same lender or a different one. However, the increase in interest rates means that the new mortgage terms may come with significantly higher monthly payments.
Unlike fixed-rate mortgages, tracker mortgages have interest rates that can fluctuate over time. These are typically aligned with the BoE base rate for a set period of time, often between two and five years.
When interest rates rise, homeowners with tracker rate mortgages may experience ‘payment shocks’ or an increase in their monthly mortgage payments after an interest rate adjustment. These higher payments can catch homeowners off guard and potentially strain their budgets.
Finally, the risk of mortgage default increases when homeowners can no longer afford their monthly mortgage payments. If homeowners are unable to make their mortgage payments consistently, it can lead to delinquency and, ultimately, mortgage default.
This can result in the repossession of the property, leading to eviction and significant financial consequences.
What to do if you're planning to secure a mortgage
Financing your home purchase when house prices are falling and interest rates are rising can be challenging. Here are the steps that can guide you on what to do.
1. Evaluate your financial readiness.
Review your current financial situation, including your credit score, income, and debt levels. Ensure that you are financially prepared for homeownership, taking into account the potential impact of rising interest rates on mortgage affordability.
2. Adjust your budget.
Reassess your budget to accommodate higher interest rates. Calculate how rising rates will affect your monthly mortgage payments and ensure that you can comfortably afford the new payments using a mortgage calculator.
3. Explore fixed-rate mortgages.
Consider opting for a fixed-rate mortgage instead of a tracker mortgage. Fixed-rate mortgages provide stability in interest rates, shielding you from future rate hikes during the loan term.
4. Shop for competitive mortgage rates.
Despite rising rates, lenders may still offer competitive rates. It's best to work with a mortgage adviser who can guide you in shopping around and comparing offers from various lenders to secure the best possible mortgage rate.
5. Negotiate the purchase price.
In a falling house price market, there may be room for negotiation with sellers. Don't hesitate to negotiate the purchase price to align with the declining market conditions.
6. Prepare a larger deposit.
Increasing your deposit can help mitigate the impact of higher interest rates. A larger deposit will lower your loan amount and monthly payments.
7. Maintain good credit habits.
Continue to manage your credit responsibly. Good credit is essential for securing favourable mortgage terms, especially when interest rates are rising.
8. Consider future interest rate trends.
Research and stay informed about economic and market conditions. Understanding the potential for further interest rate hikes can help you become proactive. The BoE will continue to exercise its monetary policymaking until it achieves its 2% inflation target, so expect interest rates to further rise.
9. Be patient and informed.
Don't rush into a decision. Take your time to thoroughly research and understand the local housing market, interest rate trends, and your own financial capabilities.
10. Prepare for possible rate locks.
If you're in the process of securing a mortgage and anticipate further interest rate increases, consider locking in your interest rate to protect against potential hikes while your loan is being processed.
11. Review mortgage terms carefully.
Read and understand all the terms and conditions of your mortgage agreement. Pay attention to early repayment charges, fees, and any potential rate adjustments.
12. Consult with a mortgage adviser.
Seek guidance from a mortgage professional who can offer personalised advice based on your financial situation and goals.
A mortgage adviser can better help you with your mortgage application
Improving your mortgage application is crucial for securing a favourable home loan. That’s why consulting a mortgage adviser is key.
The Mortgage Hut team provides expertise to help you assess your finances and offers tailored advice to increase your chances of mortgage approval. With access to diverse mortgage products, our advisers can guide you in making the best choice for your financial needs.
Speak to an adviser today by calling us at 02380 980304. You also email us at email@example.com, or book an appointment through our contact form.