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August 2, 2022
Jeremy McGivern
Posted in: Negotiation advice and techniques, Uncategorised

More nonsense printed about the impact of mortgage rates

While I was on holiday in Turkey, I was emailed an article from the FT by a subscriber.

The subject of the email was about house prices:

“Expectations to hit record/could easily fall 30%????”.

The article focused on the fact that the Bank of England is scrapping one of the mortgage affordability tests and that this was a bad idea because with mortgage rates rising it would increase the likelihood of people being unable to afford their repayments and a higher risk of default.

Apparently, the BoE’s own research estimates that about 6 percent of borrowers or 30,000 extra people would now be able to take out a mortgage.

According to the journalist, one bank boss that he was speaking to told him that “I think house prices could easily fall by 30% over the next few years”. Yikes!!! The journalist then backs up this hearsay with comments and calculations about interest only loans and interest rate increases:

A repayment mortgage borrower, moving from a 1 percent deal to a 4 percent interest rate, might see a £1000 a month payment rise by a few hundred pounds. However, an interest-only borrower with the same starting outlay could find the monthly payment rocket to £4,000. Suddenly 11 per cent inflation looks modest.” (FT – This is the wrong time to axe the BoE’s mortgage affordability test).

Scary stuff, indeed, although I didn’t pay too much attention to it at the time as my children were pestering me to go into the sea with them. However, later that day it occurred to me that the figures cited made no sense. How could the monthly payment for an interest only loan skyrocket so much compared to a repayment mortgage?

So, I sent an email to Shaun, one of the mortgage brokers I recommend, to ask him his thoughts on the article. This is his response:

The issue with the assessment in the article is that it is not made clear that the loan sums on each would be vastly different, the balance for the calculation is almost £1m apart. I have added some numbers below to illustrate:

  • A £265,000 repayment mortgage over 25 years at 1% interest has a monthly cost of c. £1,000 per month.
  • The same loan at 4% would be c. £1,400, an increase of £400
  • An interest only mortgage of £1.2m at 1% has a monthly cost of c. £1,000 per month.
  • The same loan at 4% would be c. £4,000, an increase of £3,000

As you can see, they are comparing loan payments with a large differential on the balance. A fairer assessment would be to compare the same loan sum, as follows:

  • A £265,000 repayment mortgage over 25 years at 1% interest has a monthly cost of c. £1,000 per month.
  • The same loan at 4% would be c. £1,400, an increase of £400
  • An interest only mortgage of £265,000 at 1% has a monthly cost of c. £220 per month.
  • The same loan at 4% would be c. £883 , an increase of £663

In the above example, both sets of payments for the same loan increase by a few hundred pounds, and the interest only borrowing is still significantly cheaper than the repayment option”.

(If you want to find the most suitable mortgage for your acquisition, please make contact and I can give you Shaun’s and other reliable mortgage brokers’ details).

Unfortunately, this is exactly the sort of article from a highly regarded source that sets tongues wagging and informs conventional wisdom despite being completely wrong.

As the journalist states at the start, the affordability test “has ensured that home buyers could cope with a 3 percentage point rise in interest rates”, so by his own reasoning the property market is actually on very solid foundations.

And while I agree that scrapping the affordability test is a bad idea, I completely disagree with his analysis of what will happen next. Its immediate effect will not be a crash in prices. It will cause prices to increase dramatically as it is all part of the inevitable relaxing of banking regulations that we see in every property cycle.

This time will be no different.

And if you want to check for yourself, just call your private banker or tax adviser and ask him or her what he/she is seeing in terms of bank deposits. They will tell you that they have never seen so much money sitting idle in bank accounts.

In other words, there is a lot of fuel to add to property prices. Couple this with looser banking regulations and do you really think prices are about to fall? And by looser regulations, I don’t just mean the scrapping of the mortgage affordability test. There are many more regulations which will be scrapped and other policies which will dramatically inflate prices (just look at some of the ideas coming out of the Conservative Party at the moment).

Of course, this doesn’t mean that you should sprint to your nearest estate agent and buy as many properties as possible. You must remain selective and stick to our best in breed strategy irrespective of whether you plan to acquire a home or investment property.

As a buyer you have two goals:

To find the best property your money can buy and to acquire it for the lowest price/most favourable terms possible.

If you are not sure how to find the best opportunities or negotiate effectively in the London property market, then would it be a bad idea to establish which expensive mistakes you will make?

To discover more simply email my assistant, Dee, at dee@mercuryhomesearch.com or call 02034578855 (+442034578855 from outside the UK).

About the author, Jeremy McGivern

My name is Jeremy McGivern. I am the founder of Mercury Homesearch, the internationally renowned property search consultancy, and author of The Insider’s Guide To Acquiring Luxury Property in Prime Central London. I have been acquiring property in prime central London for clients for over 13 years.

Having physically viewed over 22,000 properties in prime central London, studied the details of over 153,400 apartments, houses and investment opportunities and spoken to 232+ estate agents every week for over a decade.

My advice is in high demand and has featured everywhere from Bloomberg Television, The Financial Times and The Daily Telegraph to Forbes India and Bahrain Confidential.

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