Ahead of the Bank of England’s next Monetary Policy Committee (MPC) meeting in September 2022, and an anticipated rise again in interest rates, what can homeowners do to prepare in the current cost of living crisis?
Here Adrian Anderson, Director of property finance specialists, Anderson Harris, shares his views and tips.
Back on 4 August 2022 the Bank of England’s MPC voted to raise the base rate from 1.25% to 1.75%. This was the 6th consecutive rise in a row and reflected efforts to curb the rising inflation. On 15th September the MPC will meet again. With inflation rising to 10.1% in mid-August, it is anticipated they will raise the base rate even further with some forecasters are suggesting a possible increase to 2.25%.
Looking at the bigger picture
Looking firstly at the bigger picture, and with so many homeowners currently having fixed mortgages, it will take time for the effects of these rises to be felt.
This may limit the rise’s effectiveness on calming down the demand side of the property market. For example, those who fixed last year for five years won’t feel the effect on their mortgage for many years. Saying that, we do feel there will be a slowdown in the market this Autumn.
In the past, trackers were the vogue product, so the effects were seen faster. With forecasters suggesting further base rate rises going into 2023, it’s not surprising that longer-term fixed rate mortgages have gained popularity over the past year.
It’s also worth noting that lenders’ mortgage rates have been increasing steadily anyway and the latest base rates will have been anticipated in their approach. The rate rise will therefore impact borrowers differently, depending on the current mortgage arrangements they have in place.
Act quickly ahead of your fixed-term end
For those homeowners with fixed rate-mortgages coming up for renewal in the next six months, it’s important to act quickly. While the new rate is likely to be higher than your current product, we anticipate further increases to follow in the Autumn. Talk to an independent mortgage broker to gain an objective view of the current products available.
Factor in your plans if you’re looking at long-term fixed rate products
While longer term fixed-rate mortgages currently appear attractive, it’s important to consider whether you will want to pay off your mortgage early or move home within the term. If that’s the case, then you may face sizeable early repayment charges. Do think about how long you may live in the property, as moving will require you to reapply for the mortgage.
Consider overpaying into your mortgage
If you have the funds available and are on cheaper rates, it’s an idea to overpay into your mortgage. Not only will this reduce the pot to which interest is applied, the current rate is most likely to be cheaper than the rate you are likely move onto in the future. Also, this will help you get used to paying more when it comes to you refinancing your lower mortgage balance.
In many cases policyholders can pay up to 10% a year without incurring early repayment penalties in their mortgage during the fixed rate period. Do however check the early repayment clauses of your policy and speak with a specialist to get advice specific to your circumstances.
Check your affordability with different lenders
For those getting a new mortgage or renegotiating a current product, it’s important to be aware of your latest score on lenders’ affordability calculators.
The rising cost of living has also led many banks to update their affordability calculators in the mortgage application process. Most use Office for National Statistics’ (ONS) data to presume certain household outgoings. According to the ONS, the cost of household outgoings (including utility bills) is expected to continue to rise. With this now factored into lenders’ affordability calculators, applicants may find the amount they can borrow reduces or there are challenges to their ability to secure the loan they want.
It’s worth bearing in mind that for high earners some banks are lending on 5.5x income. Affordability is tightening but if the affordability fits, the multiples are getting bigger.
Summary
As we come to the end of summer, there is a slowing down in the property market. With the current cost of living, the interest rate rises and the expense of selling or buying property, many people are rethinking their plans. Looking ahead, it will be important for homeowners to carefully budget for their short and longer-term property costs.
