It has been well publicised that property prices are rocketing right now. According to ONS, the average house price has risen by £31,000 (13.2%) between August 20 and August 2021.
Furthermore, it’s no secret that interest rates fell to an all-time low last year and rates continue to decline as the curtain comes down on the stamp duty holiday.
Personally, I can’t see house prices continuing to rise the way they have for much longer. According to research platform, Mortgage Broker Tools, in January this year 80% of mortgage searches resulted in being affordable. Fast-forward to August and that number is now 73% which means that over a quarter of those looking to apply for a mortgage are falling short on affordability. Unless the average income is on the rise to compensate, this indicates that we are reaching the ceiling for increasing house prices.
If this is the case, then naturally a larger percentage of people applying for a mortgage will have to maximise the amount they borrow in order to buy the home they desire. The knock-on effect of this is of course stretched budgets with some walking a tight rope in terms of affordability when circumstances change. I stress when, as change is inevitable…
We are all aware that with rates being as low as they are, at some stage they will increase, and this is where I see the problem arising for those who have taken out mortgages at the upper end of their budget. Higher rates in 2-5 years’ time, when it comes to re-mortgage may mean it simply isn’t feasible to switch lender, especially if house prices have indeed reached their ceiling!
Does this mean that we are going to be adding to the estimated 250,000 mortgage prisoners created by the 2008 financial crash? Are we potentially heading for an affordability crisis?
Time will tell, but what can we as Mortgage Professionals do to prevent our clients from suffering affordability issues in the future?
Whilst we certainly don’t have a crystal ball and ultimately, we have no real control over our clients’ financial circumstances at the time of renewal, it is most definitely our duty to keep in mind the impact of any potential changes to house prices or interest rates when making a recommendation and advise accordingly.
By having more thorough discussions with our clients and by completing more detailed, accurate fact finds and budget planners, this will enable us to open up the conversation surrounding the impact a higher interest rate may have, or the effect of house prices taking a dip may have when it comes to re-mortgaging.
We might not be able to avoid an affordability squeeze entirely in the next few years but we can help prepare our clients and ensure that they are in the best position going forward.