Soaring Mortgage Costs: A 15-Year High
In a concerning turn of events, mortgage costs have reached their highest point in the past 15 years. Following the mini-budget, this surge has pushed the average rate on a two-year fixed deal to 6.66%, a rate previously witnessed in the throes of the 2008 financial crisis.
Lenders are finding themselves between a rock and a hard place as they grapple with spiralling inflation and the volatility surrounding the Bank of England’s interest rates. Key industry players were summoned before the Treasury Select Committee to discuss the implications of these increasing mortgage costs on the UK housing market and their customers.
As homeowners and borrowers shoulder the brunt of these rising costs, they’re likely to face an increase of hundreds of pounds per month on their repayments. Despite this, there is a silver lining of sorts as lenders report relatively low numbers of people defaulting on payments, largely thanks to low unemployment rates.
Potential Fallout on the Housing Market
Housing prices have consistently defied predictions, even in times of economic instability. In 2016, when the UK decided to leave the EU, forecasts of a decrease in property values proved inaccurate. Instead, the average UK house price escalated from £212,000 to £280,000 over the past five years, in spite of events such as the global pandemic and Russia’s invasion of Ukraine that caused energy, food and petrol prices to skyrocket.
However, the landscape may be shifting. The Office for Budget Responsibility predicts a potential slump in property prices, projecting a fall of around 9% between 2022 and 2024. This drop is believed to be a consequence of the higher mortgage rates and increased living costs, which have affected buyers’ affordability, leading to a slowdown in sales and an increase in price discounts in the UK housing market.
Impact on Homeowners, Sellers and First-Time Buyers
Falling house prices can trigger a ‘negative wealth effect‘, wherein a decrease in the value of the homeowner’s primary asset leads to reduced spending and increased saving. This is further exacerbated by the risk of ‘negative equity’, where the home’s value is less than the mortgage on it. As a result, homeowners may hold off on spending and making personal investments due to the potential financial risks.
For first-time buyers, however, this could potentially lower the barrier to entry into the housing market. On the other hand, existing homeowners and sellers may become reluctant to sell in a market they perceive as bottomed out, thereby reducing the volume of properties available in the market.
In conclusion, this period of high mortgage costs coupled with the possibility of diminished equity can trigger an economic ripple effect, leading to reduced spending and a possible downturn in the housing market. It’s a situation that requires careful navigation by both homeowners and policymakers.
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