With grocery,
energy and other household prices/costs rising and hitting everyone’s back
pocket, inflation (rising prices) may feel like an unimportant issue when it
comes to the cost of keeping a roof over your head.
Yet nothing could
be further from the truth for many Neath homeowners and Neath landlords.
Because inflation over
the long-term is bad for the economy, the normal weapon of choice to reduce
inflation is to increase interest rates. The Bank of England (BoE) is in charge
of interest rates.
Should inflation
continue to rise, there will come a point later in the year when the BoE will
need to raise it’s Base
Rate from its 300-year record low of 0.1%, and probably continue to do so
with a series of further increases in 2022.
When interest rates go
up, the cost of mortgages go up. When the cost of mortgages go up, that hits
the affordability of what people can borrow to buy their homes (and landlords
to finance their buy-to-let properties). In essence…
could it be the end of the Neath house price boom?
The danger
of a base rate rise by the BoE on the back of a rise in inflation over the
last few months has alarmed banks and building societies into increasing the
mortgage rates for both home buyers and landlords.
In the last week alone, lenders have
increased the rates (i.e. prices) of their mortgages, some mortgages by
more than one whole percentage point. That doesn’t sound a lot, until you punch
the numbers into a calculator (more of that later).
Neath property buyers (be they landlords or homebuyers)
have relished months of cut-price cheap mortgages rates.
Mortgage lenders
have played the big game in the last 12/16 months to capture the mortgage
business of 1 million+ Brits that have moved home since the end of Lockdown-1
plus the many millions of re-mortgages, with the cheapest mortgage rates
falling below 1%.
Yet, the money markets
have already priced into their calculations that the BoE will increase the base
to 0.25% by December, up from the existing 0.1%. They also anticipate a further
two quarter point (i.e. 0.25%) rise in the Spring
of 2022, meaning they believe the base rate will be 0.75% by the end of summer
2022.
So why is this an issue
for the homeowners of Neath? Looking at the combined totals of the SA10 and SA11 postcode
districts…
9,359 Neath property owners have mortgages totaling £546.9m (up from £563.8m in 2013).
Yet, 1,965 of those Neath
homeowners with mortgages are on variable rate mortgages, with their mortgage
payments rising and falling based on how the BoE interest rate shifts. That
will cause instant pain if mortgage providers pass on increased mortgage
repayment costs. So how much will that be?
The average size of mortgage for a Neath homeowner is £58,442.59.
If the base rate were
to rise to 0.75%, the average Neath homeowner (with a variable rate mortgage)
would be £32 per month worse off (£380 per year).
The mortgage price war
the banks and building societies have been fighting recently has resulted in
falls in the month-on-month average mortgage rates available to borrowers. The
economy is awash with cash looking for a home (mainly down to the Government’s and the BoE’s intervention to keep the UK economy going during
lockdown). This has meant, mortgages have been available at less than 1%.
However, with reports
of a potential BoE interest rate rise happening soon, those Neath homeowners
who are on a variable rate mortgage are probably going to be the first who
would feel the influence of any Base Rate increase.
If the BoE Base Rate rose to 3%, the average annual
mortgage payment of those Neath homeowners on variable rate mortgages would
rise by £1,753 per year.
This could mean
homeowners with variable rate mortgages would be spending half their salary on
their mortgage should interest rates get up to these levels.
Now the BoE won’t
increase rates by that amount over night, as that would spook the market. They
will probably increase every few months by a quarter of one percent each time.
Thankfully, over the
last 4 or 5 years, over 90% of new mortgages have been fixed rate, yet they are
only fixed for a certain length of time. If you have less than one/two years
left on your mortgage, you seriously need to take advice now from a qualified
mortgage broker, as any penalty to change might now be considerably smaller
compared to the mortgage rates you might be paying when your deal finishes in
the next 12/24 months. Again, I am not giving you advice in this article – just
making a suggestion.
A further message to
the 1 in 5 (ish) of Neath homeowners on a variable rate – please take some
advice from a qualified mortgage advisor as well. Mortgage rates can’t get any lower and all the signs are
showing they will be going up. The mortgage market is still extremely
competitive, there is opportunity for borrowers to lock in ultra-low mortgage
rates before any likely Base Rate increases filter through.
Will an interest rate hike crash the Neath housing market like the early 1990s?
The early 1990s saw
repossessions go through the roof as homeowners defaulted on their mortgage
payments because of the increased mortgage rates. Also, in the run up to the
Credit Crunch in 2008, Northern Rock were lending 125% of the value of the
property (we all know what happened to them!). Other banks were recklessly
lending 8 or 9 times a person’s income,
without the person having to prove that income. Both scenarios were significant
contributory factors in the housing market crash.
Thankfully in 2014, the
BoE implemented the recommendations of its own Mortgage Market Review (MMR).
The MMR forced banks and building societies to stress test mortgage borrowers
against potential increases of the base rate of up to 3%. Thankfully, even the
most hardened monetary doom-mongers aren’t contemplating base rates of those
levels (although I won’t apologise for highlighting what it could cost earlier
in the article).
Fundamentally, as we go
into 2022, the housing market is built on decent foundations, unlike 2007 with
the poor lending practices by the lenders. Yet the increase in base rates will
have another influence.
The psychological
factor of a perceived increase in mortgage costs, might be enough to cool the
enthusiasm and excitement of many buyers to pay top dollar for their next Neath
home, and that might not be a bad thing. If I am being frank, we could do with
something that takes a bit of fizz out of the Neath housing market.
Many Neath homeowners
have been put off placing their house on the market because they are scared
they won’t be able to find another home. A slight increase in Base Rates will
take the frothiness out of the Neath property market and return it to some form
of normality. I would even go as far as to say house prices might ease back
ever so slightly in the coming 12 to 18 months.
So don’t be
alarmed if house prices in Neath do drift slightly over the coming years like
they did in the mid 1990s.
It’s just the property market settling down and coming
back into some form of equilibrium, which is good for everyone.
Final thoughts…
The mortgage lenders
have already priced in the potential BoE Rate rises, so even if rates do rise,
let’s not panic. And even if they did rise to
3%, that would still leave them at levels that look exceedingly cheap at any
other time in history. Many homeowners in their 50’s and 60’s can remember
mortgage rates of 15% in 1992, so take advice from your family. (Interestingly,
the 50-year BoE Base Rate average is 7.2%).
Buying your Neath home
is a long-term venture. It is a huge financial decision that can give you peace
of mind and a superb place to live.
But it is not an investment. I am not saying you
should avoid homeownership, however, if you are considering buying because you
think you are making a clever investment choice, think again.
The idea that
your Neath family home can be an investment too comes from the
fact that, historically Neath property prices have risen. We all have
stories of someone in the family, somewhere in the UK, who bought a house for
£500 many years ago, for it to be worth 300% / 500% / 1000% more today!
If you read some of our past articles on the Neath property market, we have proven many times over, there are much better ways to invest your money e.g. buying buy-to-let properties or stocks and shares.
But if you want to
bring your family up in a home that is yours, the bottom line is this. Even if
interest rates rise to 3% (if not a little more), you will still be able to get
on the property ladder with a small deposit (using the Government’s 5% deposit
mortgages) and you will still find it’s cheaper to buy than rent.
