As the Bank of England hikes base lending rates to curb skyrocketing inflation, mortgage costs will inevitably rise. The average homeowner with a £224,000 mortgage can expect to pay £1,000 extra interest a year as a result, broker Trussle reckons.
This figure will continue to rise, if the Bank repeatedly hikes interest rates this year as expected.
Mortgage lenders are concerned, as they don’t want buyers overpaying for homes in today’s overheated market.
While latest Halifax figures show house prices rocketing by another 10.8% in the past 12 months, they don’t expect this to last.
As a result, they are slashing property valuations, in some cases by tens of thousands of pounds. That will make it harder for borrowers to raise the money they need to meet today’s asking prices.
Many could be forced to pull out of their purchase. Mortgage chains could collapse as a result, and this could finally trigger the long-awaited crash.
So how scared should we be?
I’m old enough to remember the last big UK property market crash, at the start of the 1990s, when mortgage rates hit a staggering 15 percent.
Many homeowners were no longer able to service their repayments, and were forced to sell up.
Between 1989 and 1993, house prices fell 20 percent.
I have several friends who were in that position. They never bought another property. Once bitten, twice shy.
Millions were trapped in negative equity, stuck owning properties worth less than they paid for them.
They couldn’t move, couldn’t sell.
Some were stuck in that dismal state for years. The fallout took years to unwind.
It feels like ancient history now, but we could be heading for a repeat?
One thing is sure. If mortgage rates were to hit 15 percent again, there would be a property market bloodbath.
But they won’t. Right now, mortgages are still incredibly cheap, by historical standards. It’s still possible to get a five-year fixed rate mortgage for around 2.5 percent, provided you have a deposit of 25 percnet.
Even if you only have a 10 percent deposit, you can still get a five-year fix from 2.75 percent.
For years, our housing market has been underpinned by cheap finance, and that is still the case today.
Prices have also been bolstered by the UK’s massive housing shortage, and there is little sign of that changing.
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I’m not being complacent here. The era of double-digit house price growth is now drawing to a close, and that’s a good thing, too.
For years, I have slammed the Bank of England for persisting with near-zero interest rates, punishing savers and driving house prices to today’s dizzying levels.
It has also forced borrowers to take on excessive mortgage debt, leaving them vulnerable if we do get a crash.
Those days are drawing to a close, and now maybe some common sense will return to the savings and housing market. I wish I could say this will help first-time buyers, but I don’t think it will.
They will find it hardest to get affordable mortages as lenders tighten criteria. Most have relatively small deposits of five or 10 percent, and high loan-to-value mortgages are riskier.
Young buyers who think this could be their chance to get on the housing ladder could be disappointed again.
That will continue to be the case, until we build more homes.