“Is now a good time to buy a house?” is one of our most read articles. As a nation obsessed with property, we all want to know when we should try to get a foot on that elusive first rung, move to something bigger or downsize and cash in.
With the cost of living crisis raging on, the housing market is expected to cool as interest rates climb higher.
While good news for prospective buyers, there’s another side to the coin: the mortgage that you need to buy that dream home (unless you’re a cash buyer of course).
Lenders have been pulling 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 figures from Moneyfacts, the financial data provider.
Rates across all loan to value (LTV) bands have also risen and are likely to rise further this week when the Bank of England Monetary Policy Committee meets on Thursday. Most bets are on a 0.5 percentage point rise. If this happens, it will take the base rate to 2.25%, the highest it has been since November 2008.
We’ve gone from ultra-low to middle-of-the-road rates in a flash. On Monday the cheapest two-year fixed rate stood at 3.79% (80% LTV), but back in January you could still find a two-year fix for less than 1%.
Translating that to pounds and pence, at the beginning of the year it would have cost you £1,130 a month for a 1% mortgage if you borrowed £300,000 over 25 years. Now you would pay £1,549 a month, £419 more.
I have been affected by this: we’re a family of four, bursting at the seams in our home and at the beginning of 2022 our plan was to move to a bigger place.
But not only did the housing market get even hotter, as rates crept up, the mortgage we once thought we could afford has now become a pipe dream.
The problem facing mortgage holders
Anyone who took out their mortgage a couple of years ago will have enjoyed 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 have been able to secure a rate of 1.14% (on a 60% LTV).
On a £150,000 mortgage over 25 years that would have equated to £575 a month.
Now with the best two-year fixed mortgage at 3.79% (80% LTV), this 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 cash once their current mortgage expires.
And even if you can afford the hit, your lender might not agree with you.
As the cost of living rises it will feed through into lender’s affordability checks, which don’t just look at income but also your outgoings.
According to broker London & Country, many lenders use Office National Statistics data when they do their affordability calculations. This means things like higher food prices and inflated fuel bills will begin to push down on what people can borrow.
So what can you do?
If you’ve got six months or less left on your current mortgage deal, you can secure a new rate now so that you’re ready to roll onto it when it ends. This is because many lender offers are valid for up to six months, giving you the option to start the process earlier and avoid any further rate rises in the meantime.
Though if you wish to leave your current deal earlier, you could incur hefty exit penalties.
Traditionally, the general advice here would have been to avoid this at all costs. But with rates increasing rapidly, one broker I spoke to told me that he’s had clients calling up saying they’d be happy to pay an early exit fee in order to lock into a rate now.
If you want to consider doing this, you will need to balance the potential savings in interest rates against any early exit fees.
Speak to your mortgage lender or broker about the options available to you before committing.
Hoping to buy? Tread carefully (but keep an eye out for stamp duty rabbits)
Keep a close eye on mortgage rates. You might have done your calculations thinking you’re able to afford to borrow a certain amount. But with rates disappearing so fast, what looks perfectly doable today might not work tomorrow.
And this is the problem: the fast turnover in rates makes it feel like you’re shopping in the middle aisle of Lidl, not embarking on one of the biggest financial transactions of your life.
The panic mood certainly doesn’t lend itself to rationale and level-heading thinking.
So if you’re like me and want to buy — rather than dreaming of that big kitchen with its shiny new worktop — do your numbers, and then do them again and again.
And if in doubt, stay put. It will be a harsh financial winter, the last thing you want is to find yourself stretched to the limit.
Finally, keep a close eye on the mini-budget later this week as there might be a stamp duty rabbit pulled out of the hat.