A reason why we should be more cautious regarding recent house price increases and what this could mean for future house prices.

Acording to the  Council of Mortgage Lenders (CML) around two thirds of residential mortgages are linked to bank base rates, e.g. “tracker” or “variable rate” mortgages.  After the sharp fall in SVR and tracker rates over the last year the vast majority of these mortgage holders will be paying less than 3% on their mortgages, in some cases closer to 1%. 

And here is the dilemma …

You would like to move home but it means getting a new mortgage, and in the current market this means mortgage rates higher than 3%.  In effect anyone moving home would end up paying more on the new mortgage even if they borrowed less money!

Here is an example …

Homeowner has a property with a £150,000 mortgage on a base rate + 1% tracker.  Their actual mortgage interest payments are currently £2,250 p.a.  BUT if they move and take out a £150,000 mortgage on their new property the mortgage rate would double to at least 3%, making their interest payments £4,500 p.a. And even if they took out a £100,000 mortgage it would still cost them £3,000 p.a., that it £750 p.a. more than their original £150,000 mortgage!

So what we have here is a false property market where prices are increasing due to the shortage of properties available (many analysts have already made these comments).  When base rates get back to “normal”, e.g. 4% or higher the differential on new mortgages will largely disappear, e.g. a new mortgage should then be similar to existing trackers of base rate + 1.5%. 

The key question is this, when people are no longer constrained by the increased mortgage costs of moving will we find a surge in properties for sale and thus a fall in property prices as supply starts to exceed demand?