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Why the mortgage market may now be out of reach for many

Author: ICAEW Insights

Published: 10 Jul 2023

With Bank of England base rates predicted to reach as high as 7% by the end of the year, millions of Britons are scrambling to find affordable mortgage refinancing. As trusted advisers to individuals and companies, accountants are here to help navigate the mortgage maelstrom.

Millions of Britons with a mortgage deal due to expire either this year or next are facing considerably higher repayments as interest rates continue their upward trajectory. Following a prolonged period of ultra-low interest rates and cheap finance, the cost of lending is on the rise.

This shock comes against a backdrop of stubbornly high inflation and a general tightening of household budgets. While think tanks call on government ministers to overhaul the UK mortgage market, perhaps introducing reforms such as much longer-term fixed-rate mortgages, none of the suggestions will help homeowners and businesses in the immediate lending crisis.

Whether an individual or a company, the impact of the mortgage situation is the same. But as trusted advisers, accountants working in collaboration with mortgage advisers can help clients forge a way through this predicament to secure the best refinancing deal or, at the very least, to plan ahead for change.

The series of base rate rises from the Bank of England have led mortgage lenders to increase their mortgage deal to as much as 6% – interest rates that we haven’t seen for almost a whole generation. Many lenders have withdrawn products so there are fewer available options, too.

There are several groups of people affected by the current situation, says Jatin Patel, Founding Partner of property finance experts Kinnison Ltd. The first is those who have an existing mortgage where their current low fixed-rate mortgage is expiring this year or next – that’s well over 1.5 million borrowers.

“The key point for these borrowers is to remember that there are things they can do now to relieve some of their stress,” Patel says. “They should begin by looking around well in advance, at least six months ahead, to secure a new rate. Then they have that in their back pocket. As they get nearer to the end of their current mortgage term, they can do a second review of the mortgage market, and if a better deal is available than what they’ve already secured, then obviously they can go for that. Banks are trying to be more flexible. They understand that this is becoming an issue for borrowers.”

For example, if you’re on a repayment mortgage, where your monthly payments include both interest and capital repayments, banks are considering allowing existing borrowers to switch to an interest-only mortgage. That will bring down the monthly payments to a more manageable level in the short term.

“The issue with that option is that obviously you stop repaying the original loan amount so your loan will last longer, and you will pay more interest for longer. But it may help borrowers see through this period of high interest rates for a year or two. Then a borrower can either make alternative repayment strategies, through sale of assets or property, or they can switch back to a repayment mortgage once inflation is under control and hopefully interest rates start to fall,” Patel says.

Despite some lenders having pulled mortgage products from the market, Patel says there is still a healthy number of products out there in terms of both variable rates and fixed rates, of two-year, five-year and sometimes even 10-year fixed rate mortgages. Admittedly, these products are a lot more expensive than what we’ve been used to, but the question is around affordability.

Affordability is more of an issue for new borrowers because they’re making a new application for a mortgage, and they’re being tested against much higher interest rates than previously. What Patel has been seeing in the current marketplace is that for first-time buyers, or those stepping up the housing ladder, it is a greater struggle to secure the loan to value. In this situation, Patel says, the Bank of Mum and Dad – where possible – is playing a huge role.

“The Bank of Mum and Dad can potentially be used to help with a higher deposit. For first-time buyers who are able to put up a 5% or 10% deposit, but are still struggling to get the loan to value to buy their property, family may be able to get them to a 25% deposit and therefore help them afford to buy the property they want at a potentially lower rate of interest thanks to the higher deposit,” he says.

Another option for first time buyers, if parents or grandparents aren’t able to help with a cash gift, is to choose a product that offers joint borrower options where both parents and adult children are named on the mortgage for added security.

“It may be that the property owner can afford the monthly payments but because of the banks’ tight affordability checks, they’re restricting the loan to value and therefore the parents can come onto the mortgage as an additional comfort for the lenders. A lot more banks are now open to that,” Patel says.

Landlords, many of which are accountants’ clients, are another group facing significant strain in the current climate. Property values have risen at a far greater rate than the rental value. The buy-to-let mortgage market is based on rental yield, so where the rental yield hasn’t kept up with capital values, we will begin to see landlords struggle to refinance existing mortgages, Patel says.

“Landlords are certainly finding that banks are not happy to lend them the higher loan to value that they may need. They’re either having to either sell up, or they’re having to inject savings to pay down the mortgage,” he says.

One final group that may suffer more during the current crisis are divorcing couples. Traditionally, during a divorce, one spouse tends to stay in the family home, especially if there are young children to consider, and the other spouse receives a payment for the equity in the property to buy a new home. 

With higher interest rates the remaining spouse could well struggle to get a mortgage to pay the equity to the spouse moving out. “So, it may be the case that divorcing couples end up being forced to sell the family home because the economics just don’t work,” Patel says.

With the ongoing uncertainty in the market, even lenders aren’t clear on when interest rate rises will peak, consequently they are reluctant to offer additional products. It is hoped that by later this year the outlook will become clearer.

“Once the market starts to settle, both in terms of inflation and rate rises, then we’ll start to see the mortgage market settle. We may even start to see some competition across lenders where they start to reduce rates because they’re getting the comfort that the Bank of England hasn’t got any more planned rate rises,” Patel says.

The current situation is different from the financial crisis of 2008, where banks didn’t have the liquidity to lend, causing a credit crunch. Today, banks are a lot stronger and have liquid cash flows. Yet until greater certainty arrives, we will have to contend with ambiguity and more expensive mortgages. But even in uncertain times, forward planning can ease the burden.

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