In an attempt to curb inflation, the Bank of England has made three Base Rate rises so far this year. Beyond the more obvious mortgage interest rate increases, how are lenders reacting to the ongoing rise in inflation, and what does this mean for borrowers?
Changes to Mortgage Affordability Calculations
Several high street banks have adjusted income affordability calculations for homeowners. While Santander announced to brokers that it would begin toughening criteria, HSBC has already started by increasing the minimum income requirement by 20% for applicants looking to source a loan of 4.75x annual earnings.
Put into context, prior to this change, £40,000 was sufficient for accessing this income multiple; however, from now, a client would need £50,000. Those with a £40,000 annual income will only have access to the same rates as homebuyers without a 10% deposit, which tend to be less competitive.
Nationwide has also reviewed its offerings, having upped salary requirements for a 5.5x loan amount, from £31,000 to £37,000.
This is because as the cost-of-living increases, borrowers’ outgoings do-so by default. As income is not increasing at the same rate as inflation, mortgage borrowers are in greater danger of running into difficulty making monthly repayments. In order to mitigate this risk, lenders need to adjust affordability thresholds to better reflect the economic landscape. Of course, this makes it more challenging for borrowers, particularly first-time buyers, who won’t be able to borrow as much as before, even though house prices continue to increase.
Buy to Let Mortgages
In the buy to let mortgage market, the challenge is slightly different. As affordability is based on rent meeting lender rent to interest calculations (RTIs), rising interest rates mean that thresholds are changing. While many buy to let lenders use a standard calculation of 125% @ 4%, those that base it against either the specific mortgage rate or a notional rate (e.g. 125% @ 2.99%) have to adjust upwards with rising interest rates. Consequently, landlords may not be able to borrow as much as before on the same rent, and rents may increase further to compensate.
Shockingly, there has been a drastic increase in the number of properties receiving a Down Valuation since the pandemic. The Telegraph reported a property manager with a portfolio of 450 properties in Nottingham who had seen the number of down valuations triple in local deals, now at 15%. Some speculate this is due to lenders’ nervousness around hyperinflation of property prices leading to a crash. However, most experts only foresee a slow in price increases, rather than any decreases; Savills still expect a 13% average increase over the next five years. It’s important to be aware of this happening and to seek expert advice and support to try and keep your mortgage deal afloat. You can read our blog on what to do in the event of a down valuation, here.
Typically, you will find that a five or ten-year mortgage attracts a higher interest rate than a short-term mortgage product, as you are locking into financial security for a longer period of time. A two-year product will therefore be a more affordable option for many. However, we are now beginning to see a swap. As lenders look to mitigate the cost-of-living crisis, attracting customers to sign up for a longer deal provides security on both ends. The result of this is we find ourselves in a unique situation where you could pay more for a short two-year fix.
It's important to remember that the impact of inflation will eventually correct itself, and interest rates will peak and come back down. Property investment is long-term, as owners benefit from increasing capital as property prices rise. While things may seem rather complicated at the moment, an experienced broker will still be able to navigate the market and source competitive and suitable property finance for you. If you are concerned about the potential interest rate rise on your home or investment property and would like to mitigate the impact, then call one of our specialist brokers to see how you can protect yourself.
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11th May 2022