The rising cost of living in recent months means many of us will have seen huge increases in our monthly expenditure. In what has been dubbed the “cost of living crisis”, many households are now struggling to make ends meet.
As inflation has hit us at 7% this year, but wages are stagnant. There have been sharp increases in our energy bills, with some households set to pay £2.5k more over the year. Fuel price and Council Tax increases, as well as food and other everyday household items. And all whilst we are receiving less from our wages with the increase in National Insurance contributions, albeit apparently temporarily.
So, what kind of effect will this have on mortgages?
Lenders base their calculations on incoming versus outgoing expenditure. They assess what you have coming in each month versus what you spend in order to calculate how much they think you can afford to pay. They apply a “stress test” which consider what you’ll be able to pay back should interest rates increase.
With less disposable income and more cash accounted for, lenders are likely to reduce the amount they are prepared to loan. What you thought you would be able to borrow, may now look a lot less. Mortgage Offers typically only last 60-90 days; waiting too long might mean that you don’t get the rates you were first offered. If a mortgage offer was made 3 months ago, before the “cost of living crisis” then this deal may no longer be available.
Lenders aren’t blind to the circumstances though and are being encouraged to reevaluate their stress test rates. This is assuming that the cost of living will eventually come down, or at least plateau.
What does this mean for first time buyers?
For first time buyers, it is looking harder to get on the property ladder. With increased costs of living and increased interest rates, coupled with inflated property prices, that cash deposit isn’t going as far as it did. House prices have risen by around 10% in the last year. Plenty of houses are on the market with people wanting to make the most of the increased prices, or perhaps looking to downsize to recoup some cost of their energy bills. But not enough people are in a position to buy at these high prices. The housing market currently looks to be in a “what came first, the chicken or the egg?” scenario.
What if I already have a mortgage?
For those who already have mortgages, now is a good time to look into fixing your rate. The base rate has increased to 0.75%, the second increase since only December 2021. The variable mortgage rate is currently 2.75% but this will increase should the base rate increase again. For fixed rate mortgages, monthly payments will not be affected if the base rate increases. For the first time in a long while, many advisors would recommend fixing for as long as possible, as it is looking unlikely that the base rate will come down any time soon.
Is there anything I can do?
Unfortunately, the answer would be, not really. The increasing rates and prices for everything are out of the control of us mere mortals. There’s nothing we can do about the rising cost of living. However, we can reassess our own outgoings and expenditure. Take a look at your finances and scrutinise, what is really essential for you to be spending? That £3.50 a day meal deal, adds up to £70 a month. Do you really get your use out of the £30 gym membership? Cancel subscriptions and direct debits you don’t get the most out of. Fix your energy rates if you can. Contact a mortgage advisor and fix your mortgage rates.
Whilst the end isn’t quite in sight, remember that we’re in it together. And if you think now is the right time to be earning more money in a new career, let us help!