The first half of 2022 has been interesting to say the least! Whereas the uncertainty of the coronavirus pandemic has subsided for the most part, it has been quickly replaced by a whole new set of new challenges - from a war in Europe to a war on our pockets.
Anyone thinking about buying a house in the near future can be forgiven for wondering how the cost-of-living crisis and the Bank of England (BoE) base rate increases will impact them. This is why we approached our panel mortgage advisors, Evolve Financial Solutions, to break down what the changes in interest rates means for prospective homebuyers and home movers.
Why has the Base Rate increased?
Put simply, it is because of inflation. The BoE is tasked by the Government to keep inflation under 2%. With the rising cost of gas, which has doubled since May largely due to Russia’s invasion of Ukraine and an ongoing worldwide shortage of consumer goods, some estimates predict that inflation could be as high as 13% at its peak this autumn! Increasing the base rate is one of the key tools available to slow spending and bring inflation back towards its target of under 2%.
How high is it, and how high will it go?
The latest rise on the 22nd September took us to 2.25%, the highest the rate has been in 14 years
Ultimately, where interest rates will go will be dependent on what happens with the economy. Although the BoE is unable to say exactly how high they could get, they have said that it is unlikely that rates will return to the very high levels that some have experienced in the past.
Does this mean I will be able to borrow less?
This isn’t a one-size-fits-all answer as lender affordability assessments are a complicated equation. However, many people will find that the amount they can borrow now is comparable to a year ago. In fact, with the Consumer Price Index (CPI) sitting at 9.4% in June, anybody who has received an inflation-based pay rise this year might find they have better affordability.
Another recent change that could benefit potential borrowers is the removal of the requirement for lenders to ‘stress test’ affordability. Since 2014, lenders have had to ensure their clients can afford their mortgage if they were to come out of their initial chosen deals onto a much higher rate. In other words, would-be homeowners were assessed on their ability to afford much higher monthly payments than what would initially be taken. This requirement was scrapped on 1st August this year; however, lenders still need to ensure they are lending responsibly. With the changes to background cost-of-living expenses and increases to the lender’s variable rates, this might not have an immediate impact to borrowing power.
Will I need a bigger deposit?
Not necessarily. During the early days of the pandemic, most high street lenders looked to control their levels of business by increasing the minimum deposit needed to as much as 20%. Since then, we have slowly seen this return to pre-pandemic levels, with Halifax making a bold (and much welcomed!) statement in June this year that they are returning to 95% lending on new-build homes for the first time since March 2020.
Interest rates will always be slightly higher on 95% mortgages in comparison to those offered if you have a larger deposit, but lenders are still keen to offer mortgages at this level. This is a real positive in the new-build market at present now the Help to Buy Equity Loan scheme is coming to an end in March 2023.
I have a great mortgage deal at the moment, should I wait until that is finished before moving?
Although nobody can know exactly how the market will go, waiting until the end of your deal could mean your whole mortgage ends up being on a higher interest rate.
Fortunately, most high street lenders will offer you the option to move your current deal to a new property (assuming you are selling your current home – take a look at Erris Homes’ Smart Move and Part Exchange schemes if so). This is known as porting your mortgage – essentially, the current mortgage deal you have is moved across to the new home without any penalty charges being applicable (assuming you are either keeping the mortgage at the same amount or increasing it) and on the same terms as when you originally took the mortgage.
If you require any additional borrowing, you would look to borrow this on the current products available by the lender. This is known as the ‘top up’ to the mortgage.
We highly recommend anyone considering porting their mortgage seek advice from an independent mortgage broker as early as possible. This is because it is important to review the options available with your current lender to ensure that porting your mortgage is an option and that they can lend you the required amount for the new property. There are some instances where porting isn’t an option, so in these circumstances we can look at the different lender options available to you.
This is the benefit of speaking to an independent mortgage broker rather than directly to your current lender, as the broker will be able to review all options to help you find the best and most cost-effective way for you to proceed with purchasing your new home.
What other options are available?
Over recent years, we have seen a trend of lenders starting to lend at higher income multiples in specific situations. Anyone earning a salary over £70,000 or a newly qualified professional might find they can borrow over five times their income with some banks.
We have also seen a trend of ‘Green’ mortgages aimed at homeowners buying an energy-efficient home with an EPC rating of A or B where preferential deals are being offered. Theoretically, these can boost affordability as utility bills as well as the mortgage commitment should be lower. Erris Homes build each new home to the highest environmental standards, meaning every home has an EPC of B or above – perfect!
Lastly, it’s worth mentioning how family can help if things are tight. Innovative new products from lenders like Generation Home have become available where you can now use up to six incomes on a mortgage application where more affordability is needed through their Income Booster product:
For further information and bespoke advice for your circumstances, always speak to an independent mortgage advisor such as Evolve Financial Solutions.
Your home may be repossessed if you do not keep up repayments on your mortgage.