By the time the new chancellor of the exchequer Kwasi Kwarteng sat down after delivering his “mini” Budget last month, Mark Said Camilleri had saved more than £6,000. The first-time buyer is in the process of purchasing a three-bedroom house in Burgess Hill, West Sussex, for £426,000, and his stamp duty bill has dropped from £6,300 before the announcement to £50.
“It is a probate sale and has dragged on a bit so the tax saving will go towards renovating and modernising the house,” says Said Camilleri, 25, a software engineer. He also managed to lock into a two-year fixed mortgage deal at a rate of 3.38 per cent before September 23, when lenders started ramping up interest rate rises.
At first glance, Said Camilleri appears to be one of the few people to have profited from the “mini” Budget, in which the chancellor announced a stamp duty cut but also sent the foreign currency and gilt markets into a tailspin, leading to an emergency intervention by the Bank of England.
Yet even he can’t rest easy. The interest rate he secured is higher than it would have been just a few months ago and he’s concerned about the future. “I’m worried about where house prices are heading and where interest rates could be when my fixed deal comes to an end in two years’ time,” he says.
Mortgage rates have been increasing since the Bank of England began raising the base rate in December last year. But the past few weeks have unleashed turmoil on the housing market, with lenders rapidly withdrawing loan products and relaunching them at significantly higher rates.
We spoke to the homeowners, homebuyers and renters caught up in the property storm.
Finance manager Angie Fernandez and her partner bought their first home in Nuneaton, Warwickshire, five years ago for £239,950, securing a mortgage rate of 1.5 per cent and repayments of £828 a month. They have remortgaged in the past fortnight and the best rate available, found using the Sprive mortgage-managing app, was 3.73 per cent, meaning their monthly payments have jumped by a third, to £1,104.
“We’re so shocked by the hike,” says Fernandez, 32. “I am pregnant with my first child but I need to cut costs on everything to find ways to make up that extra £276 a month.”
The couple’s situation is becoming increasingly common. Every three months, about 300,000 borrowers come to the end of their fixed deal, according to Neal Hudson, residential analyst and founder of BuiltPlace, a figure which will peak at 375,000 in the second quarter of 2023. “Most have been on under 2 per cent interest,” he says. “The best rate is now around double that and it may soon be treble. This is how housing markets crash.”
Millions of existing borrowers have only ever known artificially low rates — Hamptons estate agency estimates that any homeowner under 45 is unlikely to have seen mortgage interest rates as high as today.
“Many buyers also stretched their borrowing capacity to get on to the property ladder — especially during the Covid price boom — and are now going to have to remortgage at much higher rates at a time when food, utility and fuel prices have also increased markedly,” says Adrian Anderson, director of the mortgage broker Anderson Harris.
According to data from Moneyfacts, the average rate for two-year fixed mortgages was 6.07 per cent on Wednesday, up from 5.75 per cent the day before and 4.74 per cent on the day of Kwarteng’s fiscal announcement — though there is hope lenders will start to offer cheaper deals in the coming weeks.
Prospective buyers who have not already agreed their mortgage deal are facing significantly higher bills than they had anticipated. Guy Bradshaw, managing director of UK Sotheby’s International Realty, had the purchaser of a £1.7mn flat in Hampstead delay putting in a mortgage application by one week and it has ended up costing them an additional £25,000 over their initial loan term.
“Buyers are frantically redoing their sums to see if they can afford increased borrowing costs and there’s a lot of anxiety about buying now, when prices are predicted to go down,” says Emma Fildes, founder of the Brick Weaver buying agency. Analysts at the investment bank Credit Suisse predict house price falls of 10 to 15 per cent, with the consultancy Capital Economics expecting declines of a similar magnitude.
Lenders have been cautious about rapidly rising property values for a while — the property buying firm HBB Solutions estimates that almost half of purchases in the UK between January 2020 and January this year have been subject to a so-called down valuation, where the mortgage lender believes a property is worth less than the buyer’s agreed offer price. There are now fears that down valuations could increase further, putting property sales in jeopardy.
“I have seen down valuations due to the bidding wars for properties,” says Sarah Dwight, a solicitor. She is currently acting for buyer number three in a chain of six properties being sold in Birmingham and the house at the top of the chain has just been down-valued by £30,000.
“This chain has been going on for eight months and we have already had to get new mortgage offers,” Dwight explains. “There has been so much panic, whipped up by the headlines, and in 48 hours I had two other buyers pull out of purchases because they were no longer comfortable to proceed and were worried they would end up in negative equity.”
Some 40 per cent of property sales fell through before completion in the third quarter of the year, according to new figures from house-buying company Quick Move Now. Of the sales that collapsed, 41 per cent failed due to buyers changing their minds and a further 24 per cent failed when the buyer was unable to get a mortgage.
Accountant Aamir Ahmed, 33, and his brother Zahid, 36, have had to park their home ownership aspirations after the mortgage product they wanted was withdrawn. They are seeking to buy their first home together, one with enough space for their families — Aamir has a one-year-old daughter and Zahid has two boys aged 11 and seven.
They found the perfect semi-detached house in Surrey, with six bedrooms and a garden, had an offer of £750,000 accepted and were in the process of submitting an application for a two-year fixed mortgage at 3.89 per cent when it all came to a juddering halt.
“Our lender advised us that as a result of the ‘mini’ Budget, the product we were trying to secure was no longer available,” Aamir says. “We’re still upset about all that has happened and, for the moment, we have put our purchase on hold and are monitoring the market before making any further decisions.”
First-time buyers such as the Ahmed brothers will be hardest hit by rising rates, says Aneisha Beveridge, head of research at Hamptons. “Not only is inflation eroding their ability to save, but higher interest rates are affecting how much they can afford to borrow.”
Some people’s dreams of home ownership have been put back by years. Producer Ollie Ireland, 26, has been saving for the past few years to buy a one-bedroom flat in London, where she grew up. “Yet this is now unaffordable and I am going to be stuck living with my parents for the foreseeable future,” she says.
The impact of raising rates on what you can afford is significant. Analysis by Richard Donnell, research director at Zoopla, shows that as mortgage rates rise from 2 per cent to 5 per cent, the amount a purchaser can borrow while keeping monthly mortgage payments the same drops by 28 per cent. As rates rise to 6 per cent, their buying power drops by 35 per cent.
This means many people will continue to be stuck in the private rented sector, which is also struggling as a lack of stock has pushed up prices and made securing a home fiercely competitive. The housing charity Shelter says 1.1mn private tenants have had their rent hiked in the past month alone.
At the top end of the market, estate agency Savills says rental growth in prime London hit 14 per cent in the year to September, the highest growth since the estate agency launched its index in 1979.
Across the UK, an average of 141 new applicants were registered for every lettings agency branch in August, a new peak, according to the trade body Propertymark, which also says 77 per cent of member agents reported month-on-month rent price increases.
James Hathaway, director of the Reading office at Winkworth estate agency, cites an example: in September 2021, a three-bedroom terraced house less than a 10-minute walk from the centre of town was rented out at £1,500 a month. It came back on the market this September at £1,600 a month and in one week it received five offers, one from tenants willing to pay £2,000 a month. “This was due to the fact they had lost out on other properties and were determined to secure the house,” Hathaway says.
Those with shared ownership properties, which involves buying a share of a property and paying rent on the rest, are hit with a double whammy. “Many shared owners are worried not only about their mortgages, but also about annual rent reviews,” says Sue Phillips, founder of the independent information platform Shared Ownership Resources.
Housing providers can increase shared ownership rents annually above inflation — retail prices index (RPI) plus 0.5 per cent. There is no cap on service charge rises and owners have 100 per cent liability for repairs and maintenance, regardless of the size of their share. “Shared owners undertake an affordability assessment and are required to purchase the maximum initial percentage share they can afford,” Phillips adds. “So, by default, there is little ‘wriggle room’ for any increase in total housing costs.”
Rebecca (not her real name) understands this only too well. The chartered accountant bought a shared ownership flat in Huddersfield in January 2020 and it subsequently failed a cladding external wall (EWS1) survey. Rebecca has had to pay to get new fire alarms and is waiting for the original developer to do the remediation works.
Her three-year fixed mortgage deal comes to an end in January and she faces having to pay over £400 a month more. “I can’t sell the flat as buyers can’t get a mortgage on it, so if it gets to a stage where I can’t afford the repayments, I would have to look into a cash sale where I take a significant hit on the value of the property, or I go bankrupt,” Rebecca says. “It’s awful and having a significant impact on my mental health.”
There may be some winners emerging from the storm, however, notably US dollar buyers. While the dollar has been strengthening since the start of the year, sterling’s brief dip to an all-time low last week meant buyers who were poised to purchase in central London received an extra discount, agents report.
James Hyman, head of residential at estate agency Cluttons, says an American buyer recently decided to purchase an apartment in Regent’s Park for £2.5mn. “He looked at it a while back and is now going ahead, purely because the exchange rate is too good for him not to,” Hyman says.
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