You have to feel for first-time home buyers, for whom it never seems to rain but fear.
In a year in which UK property prices hit an all-time high, prospective buyers have now been hit by the cataclysmic ‘mini budget’ set out by Liz Truss and Kwasi Kwarteng.
The country’s two most powerful political figures unveiled a raft of tax cuts that any GCSE Business Studies student could have told them would short the economy, and lo and behold the Pound Sterling has sunk to depths not seen in decades.
The Bank of England has reacted by threatening further interest rate rises, while mortgage lenders have been falling over themselves to pull their products from the market – almost 1,000 were taken off sale within 24 hours of the mini-budget announcement.
So homeowners will likely see their mortgage repayments increase if they are on variable mortgages, while first-time buyers will have fewer options for borrowing and could, as a necessity, end up taking on loans that push them to the edge of their financial security.
So let’s take a deep dive together and see if we can figure out what to do next….
How High Can Interest Rates Go?
Earlier this year, the rate of interest was increased from 1.75% to 2.25%, and the Bank of England has confirmed that they will likely have to increase that again in the months ahead.
In essence, that’s a move designed to tackle stifling inflation, which is in danger of hampering any economic recovery efforts following the pandemic and the fallout from the ongoing bloodshed in the Ukraine.
The knock-on effect is that borrowing effectively becomes more expensive, and that – allied to the cost of living crisis – is causing many of us to count every penny.
There is no upper limit on the rate of interest, in theory, and some pundits warn rates could hit 5-6% next year if inflation is prolonged.
The monetary policy committee of the Bank of England meets periodically to discuss the interest rate, and their next scheduled meeting is in November.
What Should I Do About My Mortgage?
I should point out early in the piece that I’m not a financial advisor, or an expert in any sense of the word.
But common sense tells us that, if interest rates are forecast at the end of this year and again early in 2023, we should probably think about the implications on our mortgage.
The first thing to consider is when does your current deal end. If you are locked into a deal for the foreseeable future, it may just be worth riding out the storm – it’s unlikely that by breaking your existing contract, you are going to get a better deal elsewhere.
If you are on a fixed rate mortgage that is scheduled to end in the next six months, a sense of urgency about switching might be the best course of action. You can break out of some deals without any financial penalty, and if that applies to you then shopping around for the best rate now might be a smart play compared to renewing in a few months’ time.
There is a school of thought that says that paying off a chunk of your mortgage, if you are in the financial position to do so, makes sense. When it comes to renewing, you can borrow a smaller amount across the same term, which means your monthly repayments should be somewhat more manageable.
What About the Value of My Property?
Let’s think about it: people are being pushed to the brink by the cost of living crisis as it is, and the rise in the cost of borrowing is not exactly going to stimulate further growth in the UK property market.
Truss has revealed that stamp duty will now only be paid on properties worth more than £250,000, and while that puts more money in buyers’ pockets, whether that’s enough to offset rising mortgage costs remains to be seen.
If demand goes down but supply remains the same, general market economics suggests that prices will have to fall too in order to entice buyers to a sale.
There were already signs of that in September, when property values flatlined for the first month since July 2021. And that’s before the interest rate rise and before people start turning their heating on for the colder months – two further triggers of a market downturn, you suspect.
One of the problems for the UK property market is that making predictions is very difficult right now….nobody knows what trump cards Truss and Kwarteng have got up their sleeves next….
