Impact of rising mortgage rates and restricting income multiples

publication date: May 22, 2014
author/source: Kate Faulkner, Property Expert and Author of Which? Property Books
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What should I do when lenders increase my mortgage rates?

At the weekend there was lots of discussion about the Bank of England’s lack of ability to control house prices, hinting that raising interest rates wasn’t the way forward.

Clearly this has started lenders thinking and as a result, on Wednesday, news came that Lloyds were going to:-

  • Limit anyone borrowing more than £500,000 to only allow them to borrow four times their income

In addition, last week, Skipton started to raise their mortgage rates. For example, on some high loan to value rates, they went up over 0.7% while some 2-3 year rates went up by 0.5% and others by less.

What’s important to know is how quickly these increases are applied – little notice is given, so these were applied pretty instantly. If your lender does this, don’t forget therefore that you will have to find the extra money immediately, you won’t get much notice.

They aren’t the only ones either. According to the FT “Among lenders that have increased interest rates on two-year fixed rate mortgages so far this month are Chelsea Building Society, Halifax, Lloyds Bank and Virgin Money”.

Why do you need to know about rate rises and income multiple restrictions? 
There are two reasons really. The first is if your lender hasn’t increased their rates yet, they may well do, so you should stress test your own – using what’s happened above, how much extra would your mortgage payments be if they increased by 0.5% to 1%?

Secondly it suggests that government and lenders are going to take action to curb property prices now when they haven’t in the past.

This means prices may not go up so much. It may also mean the current ‘panic buying’ which is overheating London markets could well end up subsiding and so it’s important not to overstretch yourself if buying. If selling, probably better to do this sooner rather than later to get the best price.

For investors, be aware ‘natural house price growth’ shouldn’t be relied upon, you need to build in capital growth when you buy, either by buying at a discount, buying a property and adding value or extending a lease so a flat can be mortgaged rather than just bought with cash.

What will the impact of these measure have on property prices? 
To some extent we are in uncharted waters. Although I believe in intervention when markets are failing the best interest of consumers – such as the Help to Buy Scheme for new builds, too much intervention can cause unintended consequences and make situations worse.

For example, if the move to restrict mortgage lending over £500,000 then demand for these properties may fall. If they do, this may mean less come onto the market, so supply is restricted further and prices still go up due to the high number of cash and equity rich buyers around.

The current price rises happened before – after the last crash. This time they are very much in my view due to huge pent up buying demand which hasn’t been matched by sellers wanting to sell.

If demand is dampened in areas like London, then this too may hold sellers back from putting their property on the market. At the moment I’m looking at buying in London. At the start of the year, I was lucky to get a few alerts a week, now I’m getting them several times a day, so more stock in the areas I am looking at is coming forward, weakening demand now may prevent that happening in the future.

Also, it’s odd to restrict via income multiples just weeks after the new mortgage market rules came into place. If everyone is being checked properly for affordability, restricting by income multiples surely shouldn’t be required.

Overall, these interventions and the pent up demand slowly dissipating during the year may dampen house prices again by the end of the year – to some that’s good news, but if it reduces stock again, this will only leave us back into prices rising again!

Property prices will always go up and down according to demand and whether politicians like it or not, tinkering and fiddling with the market isn’t a long term solution – the only real way to solve it is to build. To build we need land.

Councils and government have lots of land, they need to start releasing it and doing so quickly!

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