Blog by Paul Broadhead, Head of Mortgage & Housing Policy at the BSA. First published in Mortgage Finance Gazette.
The cost of living crisis driven by increases in the price of food, fuel and energy is clearly impacting every household in the UK. On top of this, the increase in the Bank Rate from 0.1% to 1.25%, with more anticipated, will be on the radar for many homeowners even though it will take time for these rises to be felt by most borrowers. For context, around 80% of mortgage borrowers are on a fixed rate.
But those deals will come to an end and borrowers need to consider the impact. Media comments suggesting homeowners may be unlikely to afford a new fixed rate are unhelpful and risks adding to the uncertain economic climate that borrowers are facing. Any borrower can re-mortgage with their existing lender onto a new deal without any new affordability testing, providing they are not increasing the value of the mortgage.
The financial impact of re-mortgaging is likely to be much more modest than people expect, although I appreciate that any increase in monthly expenditure in the current environment will be unwelcome. It’s likely to cost those at the end of a 2 year fixed rate who re-mortgage to a new similar deal up to £80 more a month. For those on 5 year fixed rates, their re-mortgage is likely to increase their payments by less than £35 a month.
Interestingly, those who fixed on higher loan to value (LTV) deals are likely to be better off, with those ending 5 year fixed rates on 95% LTV expected to be around £100 a month better off.
These are the messages we should be communicating to borrowers, it’s not a time to add more, often unnecessary, worry about household finances.
Looking at the housing market, recent building societies mortgage lending statistics show lending was on par with the levels in the same period last year when the Stamp Duty holiday was in operation, and stronger than the final quarter of 2021.
The supply and demand of properties for sale has not been in the buyers favour for some time. It’s this imbalance which has led to the double-digit growth in house prices that we have seen over the last year. But signs that the housing market is softening are starting to appear. Whilst the time has not yet come, if this trend continues, mortgage affordability for house purchases will start to act as a more meaningful brake on house sales or prices, or both.
So as 2022 progresses things are likely to get bumpy for new mortgage transactions and it’s hard not to imagine that a slowdown will be experienced in the second half of this year. I wouldn’t expect any correction in house prices until next year, if at all. Even then it is unlikely to be anything like the reductions seen after the financial crisis in 2008. In terms of overall lending however, I’d expect that any gap from the reduction in house purchase loans will be taken up by the re-mortgage activity.
At times of high inflation and rising interest rates attention generally turns to mortgage arrears. However, the gradual move towards a higher Bank Rate is in the context of extremely low rates that are well below the long-term average, and very strong employment rates.
Mortgage arrears levels have therefore remained low, with the number of customers in arrears now 10% lower than a year ago. We will of course be keeping a close eye on these figures, but the high proportion of borrowers on fixed rate deals mentioned above is likely to protect many from imminent payment difficulties. For those who do find themselves struggling with their mortgage payments, lenders have a number of support options which can be tailored to find a repayment plan that a borrower can afford. The advice for anyone who is worried they may be unable to pay their mortgage is to get in touch with their lender as early as possible.
1 Based on a £130k mortgage for 25yr term. It compares the rate on the loan 2,3, or 5 years ago (depending on term) to the one available now (May 2022) on the same basis i.e. assumes 2yr fixed will re-mortgage onto another 2yr fixed at the same LTV and for the same £130k.
2 Arrears data: https://www.ukfinance.org.uk/data-and-research/data/arrears-and-possessions