As we progress further into 2022, the economic situation continues to become increasingly fraught with the UK facing a cost-of-living crisis. Inflation is soaring at record levels of 5.4%, set to increase to 7% plus come April, when the energy price cap is set to increase by 54%.  This inflation is largely fueled by the rising cost of household expenditures, notably food, oil and gas prices, with the latter potentially being made even worse by the crisis in Ukraine. To add to this tax rises are scheduled for April also, and moreover, household budgets are likely to be further squeezed as rate rises begin to feed into mortgage rates. Yet despite all this, housing demand and house prices are at record highs, with the average UK household at £288,000.

So, aside from rates rising, what does this mean for the mortgage and housing market?

The effects of inflation on the housing supply

Household costs have risen dramatically over recent months, all the while wages are stagnating. However, owners may see the record house price growth as a chance to put their homes on the market, especially while wages and pensions are being outrun by inflation and take some of the capital gains. We expect to see those of an older demographic consider this option in the coming months, as they look to downsize, or look to reduce their energy bills. This will hopefully free up much needed housing stock in the market and lead to a reduction in the rate of price increases. 

However, for the time being, average house prices have reached record highs of £288,000 according to recent ONS data, with the annual rate of growth remaining high at 9.8 per cent. This growth shows no sign of abating as yet, as supply remains low and the number of buyers looking at each property high. Many prospective buyers searching for suitable family homes sold their properties in the Stamp Duty holiday last year and remain in limbo due to the current supply shortage and thus we expect to see further rises in the short term.

While first-time buyers still face significant barriers to home ownership as deposit requirements remain challenging, the number of first-time buyers hit a 20 year high in January, 35 per cent more than in 2020. This was mainly due to a combination of high levels of employment and low interest rates. Additionally, lenders have begun offering more 95 per cent mortgages again, aided by the support from the government-backed mortgage guarantee scheme. Many first-time buyers saved relatively larger deposits earlier than usual due to decreased expenditure during successive lockdowns and some who would have  moved back into their parents homes from their rental properties in city centres. The extra demand from this group of youngsters may allow more owners to trade their entry level properties for larger properties, though, this will depend if this housing stock becomes available later this year.

Mortgage Rates: The move towards longer terms

Mortgage rates are rising across the board (bar long-fixed terms of 10-years) and will continue to do so, especially with further increases in the base rate expected. We have recently seen a paradigm shift in the interest rate environment, where for the first time in many years borrowers will face a higher rate when they come to remortgage. It is this that has led lenders to reduce longer term fixed rates and thus this has become a key battleground. Astonishingly, all that now separates the best available rate in the 3 and 5-year fixed from the 10-year fixed is 0.09% (9 BPS). This is unprecedented in the mortgage market and marks a significant shift; where it currently makes increasing sense for borrowers, if it suits their personal circumstances, to opt for a longer term. It is possible that the base rate could be higher than their actual mortgage rate within a 10-year term given the current trajectory and inflationary pressures on the economy. We are now also seeing this pivot in the BTL market with one lender launching  a very competitive 10-year product this week. People like certainty and while they cannot control rising prices in the supermarket, they can control the cost of their mortgage in the longer-term by opting for a longer fixed rate and thus we believe will see the market move in this direction and it all comes back to the root cause of inflation. 

Borrower affordability to be constricted by rising cost of living

Lender’s affordability calculators are in part defined by data from the ONS (Office for National Statistics) and once this data reflects the rising costs of living, especially post-the removal of the energy price cap in April we can expect that this will mean tighter affordability for some and lower loan amounts available than previous. There will be a lag to any changes in affordability calculators, so we see changes coming June or July to reflect ONS data from April / May. This could reduce people’s maximum borrowing, which in turn could be a problem for those already in a tight situation. Those who need to remortgage who were borrowing at the extent of their capacity may be forced to product switch instead of move lenders and get the best rate in the market. Lastly, with house prices at record highs it could be more bad news for first-time buyers. However, there is a silver lining to a degree and we may see this offset in part by the government’s ease of requirements for lenders to apply high interest rate stress tests to their mortgages. However, it remains to be seen whether lenders will choose to adopt this.

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