Awaiting next interest rate decision

Ahead of the next meeting of the Bank of England’s Monetary Policy Committee (MPC) in September 2022 and another scheduled interest rate hike, what can homeowners do to prepare for the current cost of living crisis?

Here, Adrian Anderson, Director of Home Finance Specialists, Anderson Harris, shares his insight and advice.

On August 4, 2022, the Bank of England’s MPC voted to raise the base rate from 1.25% to 1.75%. It was the 6th consecutive rise in a row and reflected efforts to curb rising inflation. On September 15, the MPC will meet again. With inflation hitting 10.1% in mid-August, they are expected to raise the base rate further, with some forecasters suggesting a possible increase to 2.25%.
Look at the big picture

Looking at the big picture first, and with so many homeowners currently on fixed mortgages, it will take time for the effects of these increases to be felt.

This may limit the effectiveness of the rise in calming housing market demand. For example, those who fixed last year for five years will not feel the effect on their mortgage for many years. That said, we believe there will be a market downturn this fall.

In the past, trackers were the hot commodity, so the effects were visible faster. With forecasters suggesting further base rate hikes by 2023, it’s no surprise that longer-term fixed rate mortgages have grown in popularity over the past year.

It’s also worth noting that lenders’ mortgage rates have been rising steadily anyway, and the latest base rates will have been anticipated in their approach. Rising rates will therefore have a different impact on borrowers, depending on the mortgage arrangements they currently have in place.
Act quickly before the end of your CDD

For homeowners whose fixed rate mortgages are up for renewal within the next six months, it’s important to act quickly. While the new rate will likely be higher than your current product, we expect further increases to follow in the fall. Speak to an independent mortgage broker to get an objective view of the products currently available.
Consider your plans if considering long term fixed rate products

Although longer-term fixed rate mortgages currently seem attractive, it is important to consider whether you want to prepay your mortgage or move before the term. If so, you may face significant prepayment charges. Think about how long you can live in the property, as moving will require you to reapply for a mortgage.
Consider overpaying your mortgage

If you have the funds available and you benefit from lower rates, it is an idea to overpay your mortgage. Not only will this reduce the pot to which interest is applied, but the current rate will likely be cheaper than the rate you are likely to switch to in the future. Plus, it will help you get used to paying more when it comes to refinancing your lower mortgage balance.

In many cases, policyholders can pay up to 10% per annum without incurring mortgage prepayment penalties during the fixed rate period. However, check your policy’s prepayment clauses and speak to a specialist for advice tailored to your situation.
Check your financial capacity with different lenders

For those getting a new mortgage or renegotiating a current product, it’s important to know 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 data from the Office for National Statistics (ONS) to infer certain household expenditures. According to the ONS, the cost of household expenditure (including utility bills) is expected to continue to rise. Now that this is factored into lenders’ affordability calculators, applicants may find that the amount they can borrow decreases or it is difficult to get the loan they want.

It should be borne in mind that for high incomes, some banks lend on 5.5 times the income. Affordability tightens, but if affordability matches, multiples increase.
Summary

As we approach the end of summer, we are witnessing a slowdown in the real estate market. With the current cost of living, rising interest rates and the expense of selling or buying a property, many people are rethinking their plans. Going forward, it will be important for landlords to carefully budget their short-term and long-term property costs.


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