What is going on with inflation in the UK right now? And how does it affect mortgages?
According to the Office of National Statistics, the consumer price index (which includes owner/occupier housing costs) rose by 7% between June 2022 and June 2023. In real terms, this means that the cost of living, fuel uncertainty and other factors have kept the rate of inflation high, despite the facts that we have (thankfully!) started to see some decreases, especially for energy costs. We are a long way from the government’s target of 2% though, so you may be wondering how this affects you if you want to apply for a new mortgage, or if your mortgage is up for renewal.
How does inflation affect mortgage rates?
Inflation can have a significant impact on mortgage rates in the UK. Here’s how it generally works:
- Purchasing Power: Inflation erodes the purchasing power of money over time. As the prices of just about everything go up, the same amount of money can buy fewer goods and services. Lenders consider this when determining mortgage rates to ensure they are adequately compensated for the decreasing value of money over the life of your mortgage loan.
- Interest Rates: In response to inflation, the central bank (for us in the UK, it’s the Bank of England) may adjust its monetary policy, particularly the base interest rate. When inflation is rising above the target level, the central bank may raise interest rates to control inflation. As a result, mortgage rates tend to increase, making borrowing more expensive. This is exactly the scenario we are seeing right now!
- Housing Demand: Inflation can affect housing demand. If inflation is high, people may perceive housing as a relatively stable investment compared to other assets that can be eroded by inflation. Increased demand for homes can drive up property prices and lead to higher mortgage rates as lenders try to manage their risk. Right now we are actually seeing house prices fall, with predicted slumps in demand later in the year. Watch this space!
- Wage Growth: Inflation can be accompanied by wage growth. If wages rise at a rate higher than inflation, it can improve borrowers’ ability to repay mortgages. But if wages do not keep pace with inflation, borrowers may face challenges in meeting mortgage payments. We are definitely seeing wage growth but we are also seeing wages increase at a faster rate than expected, putting pressure on the Bank of England to push up the cost of borrowing.
It’s important to note that mortgage rates are influenced by a complex interplay of various economic factors, and inflation is just one piece of the puzzle.
How has inflation affected mortgage availability?
- Mortgage affordability: There are some grim predictions around mortgage affordability, which is the proportion of household net income spent on monthly mortgage payments. Its worryingly predicted that in 2023 it will continue to worsen to levels equivalent to those seen in the financial crisis of 2008.
The amount the average applicant can borrow has decreased due to costs of living, however many lenders have taken a more ‘tiered approach’ with many lenders actually increasing their income multiples to 5.5 for clients earning over a certain amount (such as £75,000 per annum). Nonetheless with the costs of living and mortgages increasing, it is less prudent to stretch your mortgage borrowing than it has been in recent years. We are advising all of our clients to think carefully about this, particularly when choosing the maximum property (and therefore mortgage) value they proceed with.
- Exchange rates for foreign income: When inflation is at high levels like the kind we are seeing now, it makes our currency weaker. A weak currency leads to a lack of investment, which in turn affects the exchange rate. The exchange rate will improve as inflation decreases, but this is happening slowly at the moment. The upshot is that for those paid in foreign (non sterling income) your ability to borrow has actually improved in a certain sense, simply because your income is seen as higher in more recent times.
In March 2022, Euro to Sterling exchange rate was 0.83%. Post mini budget in October 2022 this peaked at 0.89 but is currently gently reducing to around 0.86. This means that for someone earning 100,000 Euros, the equivalent income used would be around £86,000 instead of £83000. Using very crude mortgage maths, with a lender offering 5 times income, this could increase your mortgage borrowing capacity by £15,000. It is worth noting that most lenders only use between 75% to 90% of non UK income, however the effect of changing exchange rates would result in the same proportional change.
The amount the average applicant can borrow has decreased due to costs of living however applicants paid in non sterling are typically non standard, earning above the UK average. For someone earning over £75,000 in Sterling equivalent (factoring in exchange rates and deductions as above), you may find your maximum mortgage has actually gone up compared to last year, when you combine exchange rate changes and increased income multiples for higher earners.
- Buy-to-let stress rates: The BTL market has been badly impacted by the current high inflation, as stress testing has made it almost impossible to borrow for a buy-to-let investment. Lenders such as NatWest have really tightened up their borrowing criteria in the current climate, reducing the amount of lenders who are willing to consider BTL mortgages.
- Lender appetite: Predictably, with a cost of living crisis and high inflation there are more risks for lenders, which in turn makes them wary of lending. This isn’t just in mortgages, but across all forms of loan or credit. It’s currently harder to get a loan or mortgage, but it’s not impossible and we are still helping our customers to secure mortgages for both new properties and mortgage renewals.
- Increased living costs: The cost of living is currently at an all time high and this makes it difficult for both consumers and lenders. For consumers, more and more of their take home pay is eaten up by rising food and fuel costs. For lenders, their risk is increased as the chances of a borrower not being able to make their repayments each month increases. The Office for National Statistics states that by October last year, the costs of goods and services rose at the fastest rate for over 40 years.
- Valuer appetite: A valuer’s duty of care is to the lender and not the borrower, and in light of recent risk increases mortgage valuers are increasingly finding reasons not to lend on a property and are even under-valuing properties to mitigate against this risk. It has been a trend since Covid and recent inflation has exacerbated the issue further.
Can I still get a mortgage at the moment?
Whilst it’s getting harder to get a mortgage deal that perfectly suits you at the moment, it’s definitely not impossible. We are still arranging mortgages and re-mortgages for customers everyday, and will always do our best to get you the most affordable deal available.
We are still helping borrowers secure mortgage deals. Get in contact with us using the link below to see how we can help.