What do rate rises mean for homeowners and potential homeowners?

In this Guides & Tips piece, Brian Murphy, Head of Lending at Mortgage Advice Bureau, offers insight into what rate rises mean for homeowners and potential homeowners.

How much will my mortgage increase?

The increase on your mortgage is dependent on whether you’re on a tracker, standard variable rate or fixed rate mortgage – if you’re on a fixed rate then you won’t see any changes in your mortgage for now, but with the base rates likely to continue rising through 2022 and into 2023, homeowners do need to pay attention to their mortgages.

If you’re coming to the end of your fixed rate mortgage soon and you do nothing, you will automatically go on to your lenders SVR, or a reversionary rate, which could be expensive, and runs the risk of putting you into “payment shock” – where your bills could go up sharply and suddenly and become unaffordable.

Should I remortgage right now?

There is certainly increased interest from consumers to switch their mortgage plan early. With growing concern on interest rates, increasing cost of living and energy bills, a mortgage is something homeowners can take a degree of control over by fixing their rate for a specific period.

Customers who are looking to act early by planning ahead for another rise should be aware that there is usually a penalty for leaving your current deal early, though this fee is something some are prepared to pay to have some protection against further increases in interest rates later down the line.

I’m on an SVR, should I switch to a fixed rate now?

Everyone’s circumstances are different, and as such, we would not give uniform advice on what you should or shouldn’t do. The best course of action is to speak to your adviser and figure out what the financial implications are for you should the expected future rate rises take place.

Although the volatile nature of the market has started to calm down over the past two months, the base rate is still likely to continue to rise, which makes figuring out your individual needs all the more important.

If I take out a fixed rate now, will it be set at inflated base rates which I have to pay out at for the next five years?

Of course, if you come to the conclusion that switching into a new fixed rate is the best course of action for you, then as mentioned, there may be a penalty for switching early and the current fixed rate will be higher than it was previously, but if rates continue to rise as expected, this is likely to still be at a discount to the market price as a whole.

How many times my salary am I allowed to borrow? Is there a figure I should have in mind not to exceed even if I’m allowed to (i.e., 4x salary)?

Lenders will typically lend up to 4.5x salary, although some lenders may increase this to 5 or 5.5x salary, but this is usually for higher income households. Even still, lenders are still restricted by regulatory constraints which limit how much they are allowed to lend at an income multiple of more than 4.5x loan-to-income ratio.

Lenders typically also use ONS data for mortgage affordability calculations. Your level of mortgage affordability is partly determined based upon your individual lifestyle, taking into account your expenditure on utilities, food, travel, entertainment, energy and entertainment (and so on) and measure this against your income, thereby assisting the lender in determining what they are prepared to lend to you.

My family is growing, and we need more space – should I buy a more expensive home now or wait?

Individual circumstances and affordability are key as some people are now getting to a point where they are not able to borrow enough for the properties that they want, despite a lucky few remaining relatively immune to the crisis due to high income and/or equity.

Those who are looking to “trade-up”, so-to-speak, may have to compromise on the location of their property. However, since Covid and the ‘race for space’ where consumers started to migrate away from the city life in search of properties with more outdoor space, with rural & coastal areas becoming more popular, so moving out of cities to find bigger properties isn’t a new phenomenon.

It’s also important to note that with debt servicing costs also on the rise, buying a more expensive home will for most borrowers mean even higher mortgage repayments, so some potential buyers may want to wait to see if house prices plateau   or even a fall back before considering moving.   

I’m a first-time buyer – should I still buy as soon as I can?

The current market is more constrained, with house prices going up and affordability going down. Due to increased debt servicing costs and the effects of price increases on energy, fuel and general household inflation this is starting to create a real disparity in the wants of potential buyers and what is financially viable.

The choice for many potential first-time buyers, particularly for those who don’t have access to the Bank of Mum & Dad, may be to sit on the fence for the time being. Homebuyers and demand for homes have started to ease with enquiries and footfall not at the levels they were 18 months ago. As such, it wouldn’t be surprising to see more incentives being offered in the future, such as the inclusion of white goods in the new build market, and certainly something for those getting their foot on the ladder to look out for, to offset the large costs incurred by buying a first home.

I could previously comfortably afford my mortgage, but pressures (cost of living, Covid, rate rises) mean that I now can’t. What should I do? Who can help me?

First and foremost, if you are ever struggling with mortgage repayments, you should always get in touch with your lender at the earliest opportunity. Lenders are required to exercise forbearance and to do whatever they can to help you through a difficult financial period. The costs and bad publicity associated with having to evict a struggling homeowner is something lenders will want to avoid as much as they can.

Explaining your particular situation will help your lender figure out what solutions may be available to you, and may include temporarily switching your mortgage from a Capital & Interest repayment to an Interest only payments for a finite period until you reach a point where you can afford to continue with your regular payments.

*Brian Murphy is Head of Lending at Mortgage Advice Bureau

Source: Estate Agent Today

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