- By Kevin Peachey
- Reporter’s living expenses
Misery has piled up on stressed-out homeowners and hopeful first-time buyers in recent days.
Mortgage costs have now hit a 15-year high, with the average rate on a two-year fixed contract approaching 7% – surpassing levels seen after the Liz Truss government’s small budget.
Given the severity of the situation, you can expect a wave of homes for sale and the housing market in freefall.
During the market downturn of the 1990s, the keys were turned over to lenders at a rate of 5,000 a month.
But that hasn’t happened so far, according to mortgage lenders.
People trying to buy a home still face tough decisions, and many homeowners will face financial hardship, but here are six factors that could explain why we may not be seeing real estate transactions. Past crises repeat.
1. The possibility of losing your home is very slim
When someone is late on mortgage payments and has little ability to pay, lenders may seek to recover the property.
Banks say they don’t want to foreclose and want to offer a payment plan with their customers.
Everyone’s tipping point from protracted debt to unmanageable debt is different, but the number that crosses the threshold so far is very low.
2. Higher house prices and savings create a buffer zone
During the pandemic, there are two important trends among those whose incomes are relatively unaffected by illness and lockdown.
The first is the race for space, creating high demand from home buyers. That caused house prices to skyrocket.
In turn, that means millions of home owners with more equity in the property. In other words, the difference between the value of the home and the mortgage is larger. When a homeowner comes in to get a new deal, it can mean the home loan isn’t as expensive as it could be.
The second trend is high savings, as spending options such as overseas travel have decreased. Some of that money is currently being used to pay off mortgages.
3. Some Tensions Can Be Helpful
When lenders receive a mortgage application, they will “stress test” the applicant’s finances to see if they can afford to pay the higher interest rate before approving it.
While the rules have now changed, it means that – interest rates are higher now – some people don’t have to take on unmanageable delinquencies.
Critics say the stress test, which began in 2014, meant that some applicants were turned down by lenders, even though they may have paid interest at the time.
Lenders are now testing applicants to see if they can deal with 8% or 9% interest rates – although each lender’s exact requirements are sensitive in commerce.
What if I miss a mortgage payment?
- A shortfall equivalent to a repayment of two months or more means you are officially in debt
- Your lender must then treat you fairly by reviewing any requests to change the way you pay, possibly with lower repayments for a shorter period of time.
- Any deals you make will be reflected in your credit record – affecting your ability to borrow money in the future
4. Flexible Buyers and Homeowners
Faced with rising interest rates and more expensive repayments, existing borrowers are looking at their options for mitigating higher bills.
That could include extending the term of their mortgage – although it means they’ll end up paying more over a longer period of time. However, lenders are encouraging borrowers to discuss what can be done with them or with a broker, rather than burying their heads in the sand.
First-time buyers are also willing to change their plans. At a Commons Finance Committee hearing earlier this week, Andrew Asaam, director of housing at Lloyds Banking Group – the UK’s largest mortgage lender, said: “People are booking a make a larger deposit or buy a smaller property because affordability is tight.
“We’re not lending as much as we are now, so people are curtailing what they can afford.”
5. Relatively stable employment
Borrowing costs for companies, like consumers, are rising. However, so far, there have been no signs of major staff cuts.
The job market remains resilient. So when someone has a steady job and a steady income, they’re still more likely to pay their mortgage bills – even if that means some hardship and shifting priorities. first.
Lenders say the most common reasons people have delays or foreclosures are generally life-changing events like job loss or serious illness.
6. Homeowners usually don’t have a mortgage
The interest rate required on buy-to-let mortgages is higher than that for homeowners. Typically, homeowners only make profitable transactions, making them even more susceptible to interest rate hikes.
However, MPs have heard that, of the approximately 5.5 million properties in the private rental sector, only about 2 million are mortgaged.
That means some homeowners may be immune to price increases.
Renters may feel the benefit of landlords not having to convert higher mortgage rates to higher rents. However, other costs for landlords are increasing, as are market rents, so that quickly becomes a more complicated picture.