The machinations of the housing market are currently enough to baffle all but the cognoscenti.
Interest rates are going up but some mortgage rates are coming down – perverse or what!
Throw in declining house prices – itself a rare phenomenon – and it’s one where you need your porridge in the morning before you put the thinking cap on.
The explanation is that markets always aspire to get ahead of themselves.
There was an explosion in tracker mortgages – so named because they track interest rates – as fixed deals became more expensive, soaring above six per cent last autumn. Most lenders priced in even higher future interest rates in response to then-chancellor Kwasi Kwarteng’s September mini-Budget proposals, which contained £50 billion of unfunded tax cuts, spooking the markets. Now pundits are betting on interest rates peaking at 4.5 per cent, hence fixed rate mortgage costs are in decline. Today, most five-year and many two-year packages are under five per cent. The expectation in many quarters is for them to fall below trackers by early spring.
Borrowing became more expensive through 2022 as the Bank of England sought to dampen rampant inflation. Many prospective buyers were priced out of homes they could previously afford. Between October and November, the number of UK mortgage approvals fell from 58,997 to 46,075. With demand shrinking, sellers were forced to cut asking prices.
How much further might they tumble?
Web site Unbiased stated: “Experts predict property valuations to continue dropping throughout 2023, with estimated falls ranging from two per cent to 20 per cent. That’s without factoring in inflation. This means some think prices could fall 30 per cent in real terms.”
Nevertheless, reducing house prices are a two-edged sword. Your existing property may not be worth what it was but the one up the housing ladder you have set your sights on should equally become cheaper. Good for first time buyers too. Yet nobody wants to risk negative equity. Should I stick or twist – that is the core of the conundrum.
The upside is the way price and affordability threats have stimulated competition among lenders.
Rightmove commented: “This can only be a good thing for borrowers.”
Of course, you may have no intention of moving, nevertheless face mortgage D-Day.
An estimated 300,000 borrowers come off fixed-rate deals every three months.
MoneySavingExpert states: “If your mortgage’s initial term is ending soon, beware. You are usually bumped to lenders’ more expensive standard variable rates.
“It’s always best to lock in a remortgage to start as soon as your previous deal ends. Yet in volatile mortgage markets, with rates going up and down in response to economic conditions, you don’t know whether today’s will be beaten by rates available in a couple of months. So, you need to hedge against future rate changes. You can usually lock in a new mortgage offer three to six months before you need it to start. If rates rise, you’ve a cheaper deal locked in. If rates fall, it’s likely you can ditch the mortgage you secured, and get one at a lower rate.”
Best to use a broker though.
“We say this because these deals can be hard to find as lenders often vary how long you can lock in a rate for, even within their own range. Brokers are likely to know which you can hold for months. There are risks and different outcomes to consider. A broker can advise you on these. Brokers have info that is often difficult to find, for example, lenders’ credit and affordability criteria. A good broker can ease acceptance by matching you to the right deal.”