How the interest rate hike will impact mortgages
2 August 2018
If you are covering today’s announcement that the Bank of England’s Monetary Policy Committee’s has decided to raise interest rates, please see the following comment about its impact on the mortgage market by Gemma Harle, managing director of Intrinsic mortgage network.
Gemma Harle says:
“Speculation that the Bank of England was going to raise interest rates has been rife in the market and today’s announcement will come as no surprise to many. Due to this, many lenders will have already factored into their pricing this hike in interest rates.
“Today’s announcement represents only the second time there has been an interest rate rise in a decade which means many people are in for a shock as they will have not experienced such an increase and will therefore need to adjust their current spending to accommodate this rise.
“The knock on impact of this, is that it may make people’s mortgages unaffordable. This will be especially true for mortgages that were taken out prior to the 2014 introduction of stress testing at the application stage. Those customers whose current fixed rate is coming to an end and were expecting to get a cheaper or the same fixed rate may also be disappointed.”
First Time Buyers
“However, first time buyers are likely to suffer the most due to the rise. Higher mortgage costs relative to their earnings will cause this group to be more stretched and have less cash month to month. According to figures from UK Finance the average age of a first time buyer is now 30, and has a gross household income of £42,000, and a loan to value of 85.0%.
Further figures from UK Finance, show that first time buyer advances massively increased from 26,700 in April to 32,200 in May 2018, which is a 20.6% increase month on month and 8.1% year on year. This positive increase hopefully is not quelled by today’s interest rate rise.
“To make sure people still are able to get on the property ladder, there needs to be more innovation in the mortgage market aimed at specifically helping first-time buyers. The introduction of the Post Office’s intergenerational mortgage is a good example of a product that better reflects the housing market that first-time buyers now have to contend with.
“Other products, such as the re-emergence of 100% mortgages may be too good to be true. Although, this new iteration of the 100% mortgages does differ from those offered in 2008, which contributed to the financial crisis, it is crucial all home buyers seek financial advice to assess the affordability of all the mortgage products on offer to avoid getting into financial difficulty.
“The FCA’s Mortgage Market Study announced that it wanted to tackle the systemic problem of mortgage prisoners. However, the rise in interest rates will only serve to compound the problem they face and will continue to cause them to be trapped by unaffordable repayments.