Mortgage Market Mess: What does it mean for landlords?
Rate of flux: How will this mortgage chaos affect you?
We’ve come a long way from the beginning of the year. On Tuesday 27th September, lenders left, right and centre started pulling and repricing products, leaving borrowers scrabbling to cushion themselves from the blow. What does the market’s volatility mean for landlords, first-time buyers, or those in the process of remortgaging – and what can be done to protect ourselves as much as we can?
So, what’s happening with mortgages?
Mortgage rates have been going up since the Bank of England began a series of seven consecutive rises in the base interest rate – but then they shot up after the mini-budget caused experts to predict even steeper rate rises in months to come.
Since the mini-budget, heaps of mortgage products have been pulled from the shelves; in the week following the budget announcement, a whopping 1,621 products disappeared, leaving just 2,340 on sale.
People going through the remortgaging process are preparing for a stark jump to much more expensive borrowing, first-time buyers are seeing their existing mortgage offers vanish, and landlords are bracing for their net profits to be squeezed even more – and all of this comes on top of the cost-of-living crisis hitting us all.
Why are mortgages going up?
Inflation’s at the root of it – but why?
Inflation is currently at 9.9%, and it’s not been that high since 1981. Ideally, it should be about 2%. There are lots of factors that pushed up inflation. For one, we all saved more money during the pandemic lockdowns, and now we’re back out in the big wide world, spending.
The fact of the matter is businesses can’t keep up with our spending, not least because many of them slimmed down their production during the pandemic. Combined with labour shortages and shipping challenges, the result is higher prices for goods and services. Then Putin led an invasion of Ukraine, and we saw further increases in the price of food and gas. In other words, with high inflation the money in our pockets isn’t going anywhere near as far as it once did.
Emergency brake
To help maintain a stable economy, the Bank of England can choose to change its interest rates – raising them to slow down runaway inflation or lowering them to encourage spending, therefore boosting the economy. So in September, the Bank of England used its powers to set a new interest rate to slow down inflation. It increased the base rate by 0.5% to 2.25% last week – its seventh consecutive interest rate rise since December 2021.
Why does the Bank of England’s interest rate affect mortgages?
The Bank of England base rate determines how much it charges to lend money to commercial banks – that’s the banks we borrow from for our mortgages. For the commercial bank to make a profit, they add some extra interest to the base rate, and the result is our mortgage’s interest rate. That means the interest we pay on our loans is linked to the base rate – and of course, that includes mortgages.
People with tracker mortgages will have seen repayments increase immediately, whereas those with fixed-rate mortgages will be protected until the end of their deal, at which point then they’ll be subject to whatever the market is doing and likely won’t have anywhere near such a cushy deal as last time they found a deal.
How are buy-to-let mortgages affected?
The deals on offer have changed drastically
Panicked lenders pulled hundreds of buy-to-let deals in a matter of days. The number of deals available tumbled by 55%, from 1,942 on the day of the mini-budget to just 862 a week later. And the deals that didn’t get pulled got price hikes. For instance, the average new two-year buy-to-let fixed-rate deal on offer at the end of September 2022 was 68% more expensive than the equivalent deal back in December 2021.
Small and new investors may be hit the hardest
Pricier borrowing makes it harder for landlords to turn a profit. Smaller landlords often have smaller cash reserves at their disposal, and plenty are relying on their buy-to-let investments to fund retirement.
Upping rents can help cover the extra borrowing costs, but just like everyone else, tenants are under more pressure not least due to 2022’s cost-of-living crisis. Meanwhile, new investors who have just spent all they have on a property and are already stretched by their mortgage repayments may struggle when the new interest rates hit their repayments.
Difficult decisions.
Many landlords are looking ahead to what may happen next year. Some experts think house prices will fall by as much as 15% in 2023, because of how the tightened mortgage market will reduce buying power. And if the Bank of England raises the interest rate to as much as 6% next spring, which is what they’ve warned they may have to do, this will take another big bite out of buying power.
One result of this would be more people being tenants for longer – so more demand in the private rental sector. However, some asset managers are advising landlords to sell up and get out now, with the latest rate rises proving the final straw, on top of increasing pressures on landlords.
It’s safe to say that navigating buy-to-let mortgages will be tricky for the next couple of years. So having an expert buy-to-let mortgage advisor will pay now more than ever.
How is remortgaging affected?
Switching isn’t what it used to be
Shopping around and switching suppliers is usually a wise move that pays off well – with credit cards, insurance and, until recently, energy suppliers too. The reasons why people remortgage are greatly varied, from coming to the end of an existing deal, wanting a better rate, switching from interest-only to repayment, or perhaps better overpayment options.
But now, someone coming to the end of a two-year deal at 2% will find they’re looking at a remortgage rate of 5% by October 2022. Say they borrowed £200,000 over 25 years, their repayments would go from £848 to £1,169. So unless it’s the end of a deal, it makes far less sense to switch, in most cases…
It could still be worth switching before your existing deal ends
As grim as the mortgage market is now, with interest rates expected to rise even further soon, switching now could be better than switching later. So if you’re in a position to remortgage now, it pays to act sooner rather than later – assuming you’re going to opt for a fixed-rate deal that won’t get pulled skywards by any new base rate rises.
And lenders usually allow you to lock in your next mortgage up to six months before you want it to start, so you don’t need to wait until your current deal is nearly at an end before you start the search.
The complexity around how and when to switch makes it even more important to talk to someone who lives and breathes remortgaging. You don’t need to navigate the remortgaging process on your own.
How are first-time buyers affected?
Mortgage offers are getting pulled.
Since the mini-budget announcement, first-time buyers have seen huge jumps in interest rates on their mortgage offers, with some rates reported to have doubled. With house prices rising much faster than incomes over the past 15 years or so, owning your first home is no mean feat. For would-be homeowners, not being able to get onto the property ladder is frustrating and demoralising, but getting on the ladder and then not being able to afford to stay on the ladder is a deeply unenviable position.
But if new buyers are planning to stick with the property for a good while and aren’t overstretching their finances, it still often makes sense to proceed with the buying process. However, panic-buying the wrong property in order to lock in before further interest rate raises appear isn’t such a great idea.
Is buying your first home out of reach?
Naturally, higher interest rates add to the overall cost of buying a house, thereby moving the already-difficult dream out of reach for thousands. Plus, because first-time buyers usually need to borrow a high proportion of the value of the property, the mortgage rates on offer are higher than for an existing homeowner looking for a new mortgage deal.
Higher costs mean thousands of prospective buyers have been priced out of the market. In the days following the mini-budget, Rightmove witnessed a 3% drop in the number of buyers asking to view properties on their website, while the number of sales agreed on Tuesday hit its peak since early August as buyers rushed to secure their mortgage before further rate rises appeared.
What about stamp duty?
One positive result of the mini-budget for first-time buyers was that the threshold for paying stamp duty was increased from £300,000 to £425,000. First-time buyers could save up to £6,250 as a result – though it’s unlikely many first-time buyers would be able to afford properties in that price range anyway. It also doesn’t make monthly repayments any more affordable, sadly. For some, looking at smaller properties or focusing on buying in less expensive areas may keep the homeownership dream within reach, but this won’t be possible for everyone.
There is still some support for first-time buyers though
There are a few schemes that could be more valuable now than ever for first-time buyers:
- Mortgage guarantee scheme. This is where the government backs lenders to offer more small-deposit mortgages (but be quick as this ends on 31st December 2022).
- Help to Build. This is an equity loan to help you build a home or convert an existing commercial property into a home.
- Right to Buy. This is the scheme where council house tenants can buy their council house at a discount.
- First Homes scheme. This is where first-time buyers can get homes at 30% to 50% of the market price (but heads-up: this scheme only operates in certain areas of the country).
Difficult decisions are ahead for first-time buyers, but navigating buying your first home with a Mashroom expert first-time-buyer mortgage advisor is a decision you’ll never regret.
What to do next
Whoever you are, if you own a property or are looking to buy one, now is the time to:
- Talk to an expert about your mortgage options.
- Map out those options.
- Act swiftly once you’ve made a decision.
And finally one certainty amid the turmoil: we’ll all be paying close attention to the next Bank of England rate announcement in early November.
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