After years of dirt-cheap rates and huge loans up for grabs, this year’s cost-of-living crisis could see mortgage lenders finally tighten the purse strings.
First-time buyers and families stretching their budgets for larger properties are likely to be hit as lenders rein back on the size of loans they are willing to hand out.
Households are already braced for a big squeeze, as energy bills and inflation skyrocket and the new health and social care levy tears a chunk out of pay packets.
Crunch time: Households are braced for a big squeeze as energy bills and inflation skyrocket, and the new health and social care levy tears a chunk out of pay packets
This week, it has been reported that HSBC is thinking of tightening up on lending, while the price of wholesale gas is tipped to send the average annual energy bill to £2,000.
Here, Money Mail looks at how the big squeeze of 2022 could hit your property prospects — and how you can still beat rising bills by finding a better mortgage deal.
Economists expect household spending to be an extra £2,440 this year, compared with before the pandemic, the Mail reported this week.
Families are also braced to lose 1.25 per cent of income to the rise in National Insurance, which means the squeeze on the average household could be more than £3,000.
The crunch comes after house prices rose by more than 10 per cent last year. Experts say this — coupled with tougher lending — could mean first-time buyers find it even harder to get on the property ladder.
When making a mortgage offer, banks consider your employment status, expenditure and credit history, as well as inflation data from the Office for National Statistics (ONS).
Fresh ONS figures are due to be released today and could mean banks start to become more cautious.
But experts say the real impact of the cost-of-living crisis will be clear in borrower bank statements, which underwriters scour before finalising a home loan.
Matt Coulson, director at mortgage firm Heron Financial, says: ‘Lenders won’t be able to continue with their current affordability calculations when we get the new ONS data, which will show the cost of living is increasing fairly rapidly.’
Dream flat may be out of our reach
First-home fight: Tara Clee, 25, and George Irwin, 28, fear the cost of living crunch could set them back
Tara Clee, 25, and George Irwin, 28, have saved £30,000 for their first home. But they fear the cost-of-living crunch could set them back.
Over the past six months, Tara, who works for an investment firm, and her partner George have been looking to buy a two-bed flat in Bristol for about £300,000.
But while lenders have told them they should be able to afford a £270,000 home loan on their current income, they have yet to find the right property.
Tara fears that the cost of borrowing could become more expensive for them as inflation soars.
She says: ‘We are still looking, but it’s impossible to know what kind of mortgages will be available when we eventually find a flat.’
He says first-time buyers and families looking to borrow as much as possible would miss out as a result, and adds: ‘If living expenses rise by £3,000 a year, that could impact someone’s borrowing by around £10,000 to £15,000.
This might not be the end of the world for some, but if you’re a first-time buyer who has cobbled together everything for a 5 per cent deposit, it could be the difference between buying and not.’
Doug Miller, of broker Lansdown Financial Services, agrees: ‘As monthly outgoings increase, mortgage lenders have a duty to ensure their affordability checks factor this in.
‘For people who have small amounts of disposable income available each month, applying for a mortgage will become tougher than ever this year.’
Mortgage adviser Jane King, of Ash-Ridge Private Finance, says: ‘If the cost of living rose by £3,000, between 15 per cent and 20 per cent of my first-time buyers would struggle to secure a mortgage compared with last year.
‘The people worst affected would be the “second-steppers” who have two children of school and nursery age and who want to remortgage.
‘They will have to pay extra for food, children’s clothes and nursery fees, which could mean they struggle to pass new affordability checks if they want to move banks.’
Pressure: Economists now expect household spending to be an extra £2,440 this year compared to before the pandemic, the Mail reported this week
Buyers are asked to secure an ‘agreement in principle’ before making an offer on a home.
This mortgage deal is then processed by underwriters before it is secured — meaning that if lending criteria change, you may not be able to borrow as much as first thought. The offers also expire after between 60 and 90 days.
Experts warn that buyers with an initial mortgage offer may later find the amount is reduced if the impact of the cost-of-living crisis is clear in their outgoings.
Chris Sykes, at broker Private Finance, says: ‘Borrowers could have a shock if they got their agreement in principle last year because they were planning to buy but didn’t, and assumed they could still get that level of borrowing but now can’t.
If you have talked to a lender or broker and been advised of your borrowing power, be aware that it can change.
‘Have another conversation with them before putting an offer on a house, to make sure you are still eligible for that loan amount.’
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, says: ‘There are two mortgage problems you can face when your expenses rise. The first is that you can’t borrow as much, pushing you out of the price bracket you were house-hunting in.
‘The second is that your expenses become such a large proportion of your income, you will struggle to find anyone to lend to you at all.’
She says a buyer with an annual salary of £30,000 and outgoings of £950 a month would be rated as an ‘amber’ risk by a lender for a £102,900 home loan at 3 per cent over 25 years. This is because expenses outside their mortgage would make up 52 per cent of their budget.
But if their expenses rose by £250 a month, as predicted, they could only borrow £92,400 — and with those extra expenses eating up 62 per cent of their income, they would be deemed a very high risk of overstretching themselves.
This means they would probably struggle to secure even a £92,400 loan, she says.
Experts warn that buyers with an initial mortgage offer may later find the amount is reduced if the impact of the cost-of-living crisis is clear in their outgoings
The Bank of England is considering relaxing the mortgage affordability test banks have to use, which could make it easier for first-time buyers to get on the property ladder.
But until the guidance is updated in their favour, borrowers with small deposits and limited income are likely to find it harder to buy than before as living costs soar.
The affordability test, brought in after the financial crisis, checks if a borrower can afford to pay the lender’s standard variable rate plus 3 per cent.
Other rules mean most lenders will only offer a mortgage worth 4.5 times the borrower’s salary.
But others are willing to offer wealthy buyers loans worth far more. Online firm Habito announced last month that it was dishing out to some customers loans worth up to seven times their salary.
Figures from the City watchdog, the Financial Conduct Authority, show lenders handed out 2,742 mortgages worth 6.5 times a borrower’s salary in the first six months of 2021 — an increase of 138 per cent compared with 2019.
Brokers say such rates are likely to remain open for those with high salaries and no debt, but that those on tight budgets who are hardest hit by inflation could miss out.
Laura Suter, head of personal finance at AJ Bell, says: ‘Until any changes happen, the combination of stricter affordability rules, rising costs and tax hikes eating away at salaries mean many people wanting to get on the property ladder for the first time, or to upsize, may find their borrowing ability is far lower than they would expect.’
Broker Mr Coulson adds: ‘The Bank may have to rethink its decision to withdraw the stress test.’
Rates on the rise
Last month, the Bank of England increased the base rate from a record low of 0.1 per cent to 0.25 per cent, and further rises are expected in 2022 to help tame inflation.
But any rise in the base rate means mortgage repayments become more onerous for millions on variable rates and tracker deals.
Figures from broker L&C Mortgages show that if the base rate rose to 1 per cent, a household with a £200,000 mortgage would need to shell out an extra £1,200 per year compared with before the pandemic.
Many households could struggle to meet mortgage repayments.
Aanalysis from L&C shows that last year, a typical monthly mortgage payment of about £800 was around seven times the average energy bill of £112.
David Hollingworth, from L&C, says borrowers who find a good mortgage deal could wipe out any increase in heating and power costs.
The firm’s sums show that remortgaging from an average standard variable rate of 3.91 per cent to the top two-year fixed rate of 1.36 per cent would save £2,200 a year on a £150,000 home loan.
Mr Hollingworth says that cutting your mortgage rate by just 0.65 per cent would offset the predicted £600 annual rise in bills.
Katie Brain, of analysts Defaqto, says those preparing to take out a mortgage should try to clear any unsecured debt or at least ensure payments are up to date, and limit non-essential spending such as on takeaways and gym membership.
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