The stamp duty holiday of the pandemic has created an inevitable boom in house prices, as shown by ONS data released yesterday. Accompanied by talk of rising interest rates, inflation and an energy crisis, there’s understandable anxiety amongst first time buyers and existing homeowners alike. 

Habito’s VP of Lending Operations, Alan Fitzpatrick, talks us through the realities of the latest stats and why all hope is not lost.

The ONS data shows that from December 2020 to December 2021, UK house prices increased by 10.8% to an average of £275,000. Are first time buyers going to see house prices continue to rise?

“It’s impossible to say definitively, but the 2021 rise in house prices is highly unlikely to be repeated again this year. Firstly - many people who were thinking about buying in the next 2-3 years, rushed into the market in 2021 to buy with Stamp Duty Holiday last year. This tax has now been reinstated, and those people are unlikely to be buying again this year(!) so there will be fewer buyers in 2022.

"Secondly, since this ONS House Price data was collected in December 2021, we’ve seen two base rate rises in two months from the Bank of England as they try to get a firmer grip on inflation. Base rate rises tend to lead to more expensive mortgage rates. In theory, then both these factors should lower the demand for home buying - which would have a cooling impact on house prices.”

What’s the reality on affordability with such high inflation?

“The reality is that some mortgage applicants’ affordability could decline in the coming months. I’ll explain why. Someone’s monthly expenditure - what they spend on bills, food, shopping, holidays, credit cards etc - is something that lender’s look at, to help calculate whether a mortgage is affordable or not, and how much you could borrow.

"Even though average UK wage growth picked up in January, it failed to keep up with inflation which is now at a 30-year high of 5.5%. With rent, food, energy, clothes and petrol becoming more expensive, it could mean people are approved for less borrowing than they need, or perhaps in some circumstances, not approved at all.

"But the good news is that there is innovation in the mortgage world to help counter this crunch on affordability. For example, we’ve just launched a product which lets you lend 7x your salary if you work in certain jobs. It’s definitely worth looking at, you might be surprised by what you can afford.”

HSBC this week estimated that base rates will be at 1.25% by August, and the financial markets are bracing for further rate rises over this summer. What does this mean for people who already have a mortgage?

“Firstly, no one knows for sure what will happen. However, if you are worried by uncertainty or would prefer to know exactly what you’ll pay, regardless of what happens to base rates, then it’s worth thinking about fixing your mortgage.

“The ‘winners’ from rising inflation are borrowers on fixed-rate deals. These homeowners know that their monthly repayment amounts will stay the same for years, and won’t be subject to the types of shocks we’ve seen in energy, food, and petrol bills. 

“For those that can fix for longer, now could be a good time to get a new mortgage, or remortgage for home improvements and renovations. The unusual combination of high inflation and low (in historic terms) mortgage rates on the market, makes borrowing more attractive. For those with large deposits (60% loan-to-value), there are 10-year fixes, some even <2% interest rates, for example from Halifax, or Leeds Building Society, meaning repayments are locked in until 2032. 

“Not only do long-term fixes offer homeowners protection from rising interest rates, but as inflation rises, the “real” cost of repaying today’s mortgage grows cheaper over time. Essentially, homeowners can repay the loan in ever-cheaper pounds, which can ease the cost of borrowing. Homeownership is considered somewhat of a natural hedge against inflation, given the trajectory of most homes, in most regions, to appreciate over time, and of course, those who own their homes, aren’t exposed to rent inflation either which is also increasing; Zoopla reported last week that rental costs are rising at the fastest pace for 13 years. 

“That said, these cheaper mortgage deals are not likely to be around for too much longer so it’s important to speak with a broker.”