How is the mortgage market supporting house prices?
Peter McGahan
Monday 28th October, 2024.
OVER the last two weeks I covered the housing market and this column is about why the market has turned and how rates are misunderstood.
At the beginning of this rate rise, we were clear they wouldn’t rocket as the mainstream press said, and we explained that in this column. They haven’t. In conversations we are having with borrowers it’s clear that fear has stuck, so let’s look at the facts again.
In July 2023, a two-year fixed rate would have cost 6.86 per cent. In October 2023, the best five-year rate was 6.51 per cent. We did say in a few columns not to do it.
Remember that the average outstanding balance is £132,378 in a UK household. New mortgages in 2024, had an average of over £184,000.
A mortgage fixed at that 6.86 per cent rate for £132,378, would have cost you £923.83 per month. The best two-year fixed rate available today is 3.94 per cent. Cost - 694.36 per month. That’s an extra cost of £5,507 for those two years.
The five-year rate is equally disturbing. Had you fixed at the peak rate of 6.51 per cent, the monthly cost would have been £894.65. Total over the five years - £53,679. Whereas the best five-year rate today is 3.88 per cent, at a monthly cost of £690 and a total £41,399 over the five years. That’s a staggering £12,280 extra.
It would have paid to keep a cool head, and hopefully you did. Again, although rates rose this week, if you look beyond the DRAMA, the two year gilt yield have fallen around 0.2 per cent in the past week. Swap rates have come back down again by around 0.2 per cent.
Banks are also loosening their criteria. Nationwide, for example, will lend up to six times income on its first-time buyer range whereas it used to be 5.5 times. Others are also available.
Halifax has said they will allow foster care income to be used in affordability reasoning. They have also increased their loan to income limit from 4.49 times to 5.5 times as has Lloyds. So based on an income coming into the home of £50,000 the total loan available would be £275,000 as opposed to £224,000.
Interest only mortgages are back as well with Santander offering 40-year terms, which reduces monthly cost, and allows greater flexibility for monthly payments. Other banks have allowed earned income to be considered for 75-year-olds - it used to be up to maximum of 70.
Commonly, people are earning from two different countries and some banks are now lending up to a 95 per cent loan to value for those who have leave to remain in the UK or who have settled status. It used to be that both applicants had to have this to access the higher loan to value. Now it’s just one of the applicants.
Second jobs used to be a problem. Only 50 per cent of that income could be taken into account, but some banks will now lend 100 per cent of that income.
If you are in a probation period for your new role, some banks will be happy with a copy of your contract and a payslip rather than having to wait for the probation period to end.
Moreover, lenders are also incentivising retrofitting and green mortgage lending. This loosening of criteria is expanding, and as such will allow greater flexibility and will make it easier to borrow.
Inflation is also a gust of a tailwind for rates and the housing market. It is now at a three year low of 1.7 per cent, below the two per cent target. This increases the chances of a rate drop at the next meeting by the Bank of England, and a potential subsequent one.
Sales are up 10 per cent across the country, and sales agreed are up 25 per cent since 2023.
I refer to my earlier point in this trio of a series of housing market columns – sentiment. Whether we think it is, or think it isn’t, it will be right, because we will make it that way.
For a complimentary Mortgage Interest Rate Guidance Report and Summary, please email my Mortgage Director Pat Greene on pgreene@wwfp.net or call 01872 222422.
Peter McGahan is the Chief Executive Officer of Independent Financial Adviser Worldwide Financial Planning. Worldwide Financial Planning is authorised and regulated by the Financial Conduct Authority.
