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.
Lenders are likely to reduce the amount of loans that they will lend to first-time buyers or families looking to purchase larger homes.
Already, households are facing a major squeeze as rising energy costs and inflation mean that household incomes will be cut significantly.
It’s crunch time! Households face a major squeeze due to skyrocketing energy and inflation, as well as the new health- and social care levies that eat a lot out of paychecks.
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.
After house prices rose more than 10% last year, the crunch is upon us. Experts say this — coupled with tougher lending — could mean first-time buyers find it even harder to get on the property ladder.
The Bank will consider your job status, credit history and spending history when making a mortgage proposal. They also take into account inflation data provided by the Office for National Statistics.
Today’s release of fresh ONS numbers could signal that banks are becoming more cautious.
Experts say that the true impact of the crisis in cost-of living will become apparent when the bank statements are reviewed by underwriters before approving a 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.’
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. Also, the offers expire between 60-90 days.
Experts advise that buyers who accept an initial mortgage offer could find their amount reduced later if they are able to see the effect of the crisis on their financial 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.
You should be aware of the possibility that your borrowing capacity may change after you’ve spoken to a broker or lender.
‘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. The reason is that expenses beyond their mortgage budget would account for 52% 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 advise that buyers who receive a first mortgage offer could find out later that the amount has been reduced, if there is a clear impact on their monthly expenses from the cost of living crisis.
Bank of England will relax mortgage affordability tests banks must use. This may make it more easy for first-time home buyers to move up the property ladder.
However, until this guidance is revised in their favor, borrowers who have low incomes and small deposits will likely find it more difficult to purchase a home as the living expenses 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.
Others are prepared to give loans that go further for wealthy customers. Habito an online firm announced last month it would offer loans to customers up to seven-fold their annual 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.
These rates could be open to those earning high salaries with no debt but they may not be available to those on tighter budgets, who might lose out due inflation.
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.’
The rate of inflation is on the rise
The Bank of England raised the base rate last month from 0.1% to 0.25 percent, a new record, to curb inflation. Additional increases are anticipated in 2022.
However, any increase in the base rates means that mortgage payments become more difficult for millions of people who have tracker or variable rate mortgages.
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.
It is possible for many households to not be able to pay their mortgages.
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 from analysts Defaqto suggests that anyone considering a mortgage should pay off any unsecured debts.