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11th November 2022
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navigating mortgages uk 2022 inpageThe era of ultra low interest rates has firmly met its demise, leaving a generation of borrowers bracing for a sharp increase in their monthly repayments during an existing cost-of-living crisis.

It’s official: the days of cheap money, born in the wake of the global financial crisis, are behind us. Yet while some may say interest rates are returning to a more normal level by historic standards, the drastic leap in mortgage costs at a time when households are already under the strain of high inflation will leave millions of homeowners financially exposed over the next year.

Since December 2021, the Bank of England has increased its interest rate from 0.1% to 3%. It expects inflation to have peaked at just under 11% in October and that it will remain over 10% in the next few months. The impact on borrowing has been significant, and in his first address as Prime Minister last month Rishi Sunak said the UK now faces “a profound economic crisis”.

What a difference a year makes. Just 12 months ago, mortgage lenders were locked in a new race to the bottom following a decade of ultra low rates, with some pricing two-year fixed mortgages under 0.8%. The era of ultra cheap borrowing has since come to an abrupt end.

Last month the average rate on a two-year fixed mortgage surged past 6% for the first time since the global financial crisis in 2008. Despite signs that mortgage rates will fall back – Nationwide, for instance, reduced its fixed rates for existing customers by up to 1.3% on 1 November – Zoopla believes mortgage rates of 4% to 5% are likely to become the new norm.

“Interest rates are now about what they were in 2007, before the crash. We have been absolutely spoiled in the period since the financial crisis but that’s now over,” says Marie Dalrymple, Equity Release and Mortgage Specialist at Ascot Lloyd. “This time last year, five-year fixed rates were as low as 0.99%. Last week I quoted 5.39% for a client, which is cheap right now!

“It's very hard at the moment and, as a result, everything has almost ground to a halt in recent weeks. I’m not just talking about the traditional mortgage market but also equity release, which was growing in popularity but rates have gone from 2.49% to over 7%* in the last year. People are holding out that rates will go down, it’s a real waiting game and something’s got to give.”

Bracing for impact

The effect on mortgage repayments for a generation of borrowers who have become accustomed to very low rates is stark. The vast majority of borrowers are on fixed-rate deals, leaving more than five million families exposed to an average £5,100 spike in their annual mortgage costs, according to the Resolution Foundation. This is at a time when the biggest cost-of-living squeeze in 40 years is already causing a struggle for many households in the UK.

Some 1.7 million households will see their mortgage payments rise in the last months of 2022, followed by a further 400,000 households in early 2023, the Resolution Foundation's analysis found. By early 2025, the additional mortgage costs will have absorbed at least 5% more of net household income in half of all mortgaged homes, rising to over 10% in around 2 million homes.

“The market is still very uncertain and people are worried,” Marie Dalrymple says. “The rising costs of everything is hard to deal with, particularly for those who borrowed at their maximum capacity to buy a bigger house because they are also now having to deal with rising energy bills as well as the general cost of living. Given the circumstances, it would be wise to revisit your retirement plans with your financial adviser to find ways to ease the strain in the short and medium term.”

Amidst the spike in fixed-rate mortgage rates, variable deals may look more appealing. Tracker mortgages are linked to the Bank of England rate while discounted variable rates are linked to the lender’s SVR, meaning they can move up or down. This can deter those who prefer more predictability in their outgoings, but others will be attracted to the lower rates on offer, especially if they think the BoE base rate will peak lower than the 5%-plus that markets have priced in. Some economists, including those at banking firm ING, believe it will peak no higher than 4%.

Finding a suitable mortgage can be challenging at the best of times, let alone during periods of market volatility when lenders are withdrawing products and introducing more stringent affordability checks. An independent mortgage adviser with whole of market access, such as at Ascot Lloyd, will be able to analyse your unique circumstances, including objectives, income and expenditure, credit history, future plans and affordability, to find the best product for you.

House price dip

The surge in borrowing costs is likely to affect residential property prices. Demand for new homes from first-time buyers dropped by a third after the doomed mini-budget in September, and data from Nationwide has shown that UK house prices fell by 0.9% month-on-month in October, the first such decline in 15 months. NatWest predicts a 7% dip in house prices in 2023.

Existing homeowners, however, should remember that this follows a period of sharp ascent in the value of their property, with 10 years of house price growth compressed into two years in some regions. If house prices do fall by as much as some analysts are currently predicting, the average home in the UK will still be worth considerably more than it was before the pandemic.

“It’s important to remember the value of a long-term financial plan, designed to ride through peaks and troughs in the markets,” Marie Dalrymple adds. “The bigger picture is property prices have grown quite rapidly in the past couple of years and a mild rebound in the short term will not be very consequential to your long-term plan. That doesn’t make things any easier in the short term, however, so speaking with an independent mortgage advisor could be highly worthwhile.”

While residential homeowners may find it easier to take comfort from this longer-lens view on property values, a new era of higher rates as the norm will undoubtedly make life even harder for buy-to-let landlords, including those who rely on the income to support their retirement. In recent years, changes in government policy have substantially increased the tax burden on landlords, introducing a 3% stamp duty surcharge and reducing mortgage interest tax relief.

Add to these challenges a mortgage burden that is likely to see repayments multiply by two or three times than what investors have been used to and it’s easy to see how a large portion of landlords will no longer be able to justify property as a sustainable source of retirement income.

That said, there are always opportunities available for those in a position to take advantage of them. Cash buyers with the ability to move quickly could find themselves with opportunities to bag themselves a property bargain in 2023, and there are options to help make buy-to-let investing more viable, such as owning property in a limited company. Your independent financial adviser will be able to work with you to reevaluate how property features in your retirement plan.

Taking on a mortgage, for your own home or a buy to let, is a big life decision and remortgaging can be confusing. At Ascot Lloyd, we source products from the whole of the market, with access to special rates which are not available direct to you. Get in touch to find out how we can help.

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IMPORTANT INFORMATION

Past performance is not a guide to future performance and may not be repeated. Investment involves risk.

*Rates quoted on 8/11/22 based on equity release and subject to change.  

Your home may be repossessed if you do not keep up repayments on your mortgage

Equity release isn’t right for everybody and every home, so it depends on you and your circumstance

The value of investments and the income from them may go down as well as up and investors may not get back any of the amount originally invested. Because of this, an investor is not certain to make a profit on an investment and may lose money. Exchange rate changes may cause the value of overseas investments to rise or fall.

This communication is for information purposes only. Nothing in this communication constitutes financial, professional or investment advice or a personal recommendation. This communication should not be construed as a solicitation or an offer to buy or sell any securities or related financial instruments in any jurisdiction. No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, nor is it intended to be a complete statement or summary of the securities, markets or developments referred to in the document.

Any opinions expressed in this document are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or companies within the same group as Ascot Lloyd as a result of using different assumptions and criteria.

This communication is issued by Capital Professional Limited, trading as Ascot Lloyd.  Ground Floor Reading Bridge House, George Street, Reading, England, RG1 8LS.  Capital Professional Limited is registered in England and Wales (number 07584487) and is authorised and regulated by the Financial Conduct Authority (FRN: 578614).