The UK house sales market
Beware! - Life after the credit crunch
For many people 2007 will be remembered for the year when it started, the year when the cost of mortgages started to rise.
After many years of low bank base rates and mortgage interest rates many of us have become used to lower costs of borrowing. There have been some amazing fixed rate deals but these are coming to an end as the lenders seek to cover themselves against the risk of bad debt and, in some cases, to compensate for the losses they have made from the sub-prime mortgage market. And higher insterest rates will affect UK house sales.
Unfair is a word that comes to mine, why should I pay more for my mortgage because some banks have exposed themselves to sub-prime mortgages as a way of boosting profits, only to end up making huge losses. This is an understandable feeling but there is little that the individual can do about it.
On the positive side there have been some news articles about bank base rates falling in 2008, this may well happen, possibly 0.5%, but it is unlikely to be more than this as there are inflationary pressures - if interest rates fall too far then borrowing and spending increases to a point where it drives up inflation.
The future of mortgage interest rates in 2008
So what about your mortgage payments, what is the forecast for them? This is where some may be surprised by the answer. For the majority of those with mortgages you are going to see increasing costs, even if bank base rates fall by 0.5%. Why is this some may ask? It is basically due to the margins that lenders charge over base rate.
Bank of England base rates are the "baseline", anyone who borrows money will pay an interest rate that is linked in some way to the base rate. With the credit crunch banks are now having to borrow money at a rate above the "Bank of England base rate", and if they pay more then we, the end consumer, has to pay more. But it doesn't end there. In addition to the higher rates that banks are paying to borrow money they also need to cover their sub-prime losses and also mitigate future bad debt. Thus most of us will be paying a further premium on top of the rates the banks borrow at.
Sadly it doesn't end there. If you are one of the unfortunate ones who has fallen into arrears following a period of unemployment, or sickness, you will find it much more difficult to get a re-mortgage. Existing lenders will increase (some already have) their standard variable rates (SVRs), effectively adding a huge amount to your monthly mortgage, typically the SVRs will be 2% to 2.5% or more above the Bank of England base rate. When people have been enjoying fixed rate deals of around 5% this is like seeing a 50% increase in the cost of the mortgage.
Take action
Things will get better, but it could be a few years, in the short term it means homeowners having to cut down spending or risk getting repossessed due to mortgage arrears. If too many people fall into this situation it will have a pronounced effect on UK house sales with falling prices where supply exceeds demand.
In summary, the best advice anyone can offer is to be proactive. If your finances are stretched now they will be even more so once mortgage rates increase. Look at ways to cut your outgoings, if you do start to fall into arrears with no way out then consider services for a quick house sale and rent back. Take no action and you risk losing your home.