Higher mortgage rates reduce home prices that buyers can afford

Homebuyers in Britain need to lower their expectations, attract more money, or get sellers to lower their prices.

The explosive rise in mortgage rates has severely eroded the purchasing power of buyers, who will find that the amount they can afford in monthly payments goes far less than a year — or even a month — ago.

On the basis that most people’s earnings won’t go up dramatically, a decrease in the amount you can borrow based on what you can afford to pay each month will have a huge impact on your home buying aspirations.

A home buyer who can pay £800 a month could get a £200,000 mortgage a year ago for a £270,000 house, while that monthly payment gets you a £130,000 mortgage today

A home buyer who can pay £800 a month could get a £200,000 mortgage a year ago for a £270,000 house, while that monthly payment gets you a £130,000 mortgage today

A homebuyer needing a £200,000 25-year mortgage to buy a £270,000 property will find that the best five-year fixed rates on the market are currently around 5.4 per cent and monthly payments will be £1,215.

A year ago this same buyer was looking at five year fixes at 1.5 per cent, with monthly payments of £200,000 from around £800.

Just a month ago, the best comparable five-year repairs were much lower by about 3.5 per cent, and the monthly payments on £200,000 were about £1,000.

The purchasing power of a buyer’s £800 monthly payment has fallen from a £200,000 mortgage a year ago to £130,000 now

Turn this round and the numbers will become clearer.

At current interest rates, the purchasing power of a theoretical home buyer’s £800 monthly payments drops from £200,000 a year ago to £130,000 today.

Add £70,000 of deposit or equity into the mix and instead of a £270,000 property, they can now buy a £200,000 house.

Even if you compare things to just a month ago, things have changed dramatically. £1,000 Monthly Payments Early September On A £200,000 Loan Our home buyer now only gets a £165,000 mortgage, which deposit has been added to a £235,000 property.

Based on the same monthly payments and deposits, a mortgaged homebuyer can purchase a home 13 percent cheaper than it was at the start of September — and 25 percent cheaper than it was a year ago.

Buyers at the top of the cost ladder see a more pronounced monetary difference in the price they can pay for the same mortgage payments.

For someone taking out a £400,000 25-year mortgage – which is more common in Britain’s high house prices than many might think – to buy a £700,000 property, the five-year fixed monthly payments would have been a year ago £1,600.

A month ago the monthly payments on this loan would have been £2000 but now it is £2430.

Turn that around and the buying power of £1,600 in monthly payments would drop from a £400,000 mortgage a year ago to £265,000 today.

Everything else is the same, and that’s the difference between being able to afford a £700,000 house then and £565,000 now.

You can check what prices you will get and how much it will cost to buy now through our website Mortgage calculator.

Mortgage rates have skyrocketed over the past year, hampering how much homeowners can borrow for the same monthly payments

Mortgage rates have skyrocketed over the past year, hampering how much homeowners can borrow for the same monthly payments

Overall, there has been a significant drop in how much buyers can afford to spend without finding a lot of cash each month, and that still has to be given by the normal real estate market statistics we see.

Annual home price inflation is still rising at 9.5 percent, according to the National Building Association, and home prices were flat in September.

This data is based on mortgage approvals and is more timely than Land Registry/ONS numbers released a few months later, but even then, it usually takes time for lower rates to hit the Nationwide or Halifax benchmarks. Some economists are already forecasting a decline in house prices.

My anecdotal armchair property survey flashes red for house prices. The past month has seen the “Latest Runway” run of Rightmove results for my local area showing an increased amount of “Discounted” tags.

I did a quick check as I was writing this column of what happened this week. Since Monday there have been 27 properties listed on Rightmove’s ‘latest listing’ in my town: seven are new to the market and one is back on the market after being on the market but 19 have had their prices reduced.

One bold home seller decided to reverse the trend and raise the asking price.

Sellers lower their initial asking prices by about 5 to 10 percent, as they lower expectations and try to get ahead of the curve.

When it comes to gauging market temperature, this is telling, but what remains to be seen is how much a new era of more expensive mortgages will affect home prices.

Not all buyers are affected, about 35 percent of home purchases are made by cash buyers who don’t have to worry about anything embarrassing like a mortgage.

However, while they may not have to black out the bank or build a community door in order to buy, they may have to sell to someone who needs to.

Meanwhile, even the home seller’s holy grail, the string-free cash buyer isn’t entirely immune.

They can see what’s going on in the world and most of them are not in a position to rack up hundreds of thousands of pounds to buy a property outright without being at least careful with their money.

At the same time that this happened, my energy bills and other household bills jumped—although you wouldn’t need me to tell you that.

The Office for National Statistics says the food store is 14 percent more expensive than last year, and everywhere you look it seems people are jacking up prices.

Meanwhile, even with Liz Truss’ £2,500 energy price cap frozen, the average household gas and electricity bill is twice its level at the start of 2022.

For all the Panglossian thinking in the real estate industry—where everything is for the best in the best of all possible worlds, as with Voltaire’s eternally optimistic philosopher in Candide—it’s hard to envision a scenario where the huge jump in new mortgage costs and household bills doesn’t calm the market.

If you kept housing prices a lid it wouldn’t be a bad thing, the rampant property inflation seen in the pandemic boom has made homes ever more expensive relative to wages and that’s nothing to celebrate.

The problem is that the rise in mortgage rates is now so dramatic that it will cause serious financial pain for some, especially the heavily mortgaged generation of homeowners in their 40s, 30s, and 20s.

But whether the rampant property inflation will stop is not the question people are asking, they want to know if housing prices will come down.

The only answer to this kind of question is, “Who knows?”

Most of them believed that house prices would suffer a potentially prolonged and prolonged decline after the initial freeze in the real estate market when we entered the lockdown early in the covid pandemic; Instead, after a short wiggle, we got a spurt that added 20 percent.

This means that any predictions should be taken with a grain of salt, especially considering that the opposite of what common sense says should happen often does the UK property market.

After all, the British property market has been sustained for years by people being able to borrow at ever cheaper rates to afford ever higher rates. Mortgage rates have taken a dramatic turn this year, and that is sure to be a game changer in the end.

Even if we do indeed reach the peak in mortgage rates – which we could reach in the midst of a market frenzy before the prime rate peak – it is difficult to envision a scenario where money becomes more expensive and does not affect house prices.

What to do if you need a mortgage

Borrowers who need to find a mortgage because their existing fixed-rate deal is coming to an end, or because they’ve agreed to buy a home, are urged to act but not panic..

Banks and building societies are still lending and mortgages are still being accepted with applications accepted.

However, rates change quickly, and there is no guarantee that deals will stick and won’t be replaced by mortgages that charge higher rates.

This is Money’s best mortgage rate calculator powered by L&C that can show you deals that match the value of your mortgage and property.

What if I need to re-travel?

Borrowers should compare rates, talk to a mortgage broker, and be prepared to work to secure a rate.

Anyone with a fixed-rate deal that expires within the next six to nine months should consider how much a remortgage will cost now — and consider a new deal.

Most mortgage deals allow a fee to be added to the loan and then only charged when you take it out. By doing this, borrowers can secure a rate without paying expensive arrangement fees.

What if I’m buying a house?

Those who have agreed to buy homes should also aim to lock in prices as early as possible, so they know exactly what their monthly payments will be.

Homebuyers should beware of overexerting themselves and be prepared for the possibility of home prices falling from their current high levels, due to high mortgage rates limiting people’s ability to borrow.

How to compare mortgage costs

The best way to compare mortgage costs and find the right deal for you is to talk to a good broker.

You can use our best mortgage rates calculator to show matching deals for your home value, mortgage size, term needs and flat rates.

Be aware that rates can change quickly, so the advice is that if you need a mortgage to compare rates then speak to a broker as soon as possible, so they can help you find the right mortgage for you.

> Check out the best fixed rate mortgages you can apply for

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