Affordability should be considered over rates
There has been much conversation over the past month around the cost of a mortgage with the Bank of England currently in a hiking phase. In addition, few could have predicted the reaction to the mini-budget, which resulted in many mortgage products being withdrawn from the market. “However,” says Iain McKenzie, CEO of The Guild of Property Professionals, “that is the just the thing, it was products that were removed from the market, not lenders. Lenders are not withdrawing from the market, and we are in a vastly different scenario from what was experienced during the global financial crisis. Products were removed so that lenders could reprice them based on the rising interest rates, which again, if we look at historical data is still comparatively low. Lenders are still in the market and there are mortgages available to buyers.”
He notes that since 1975, the base interest rate had not been below 4% until it dropped to 3.75% and then 3.5% in 2003, which was the lowest it has been in 28 years. Before the global financial crisis, interest rates went up to 5.75%, before they were dropped to 0.5% in 2009. Since then, interest rates have remained low until this recent hiking phase. “Inflation is at its highest level for over 30 years and the mechanism the Bank of England uses to try and curb and control it is the interest rate. High inflation causes many economy issues and at a rate of 10%, which is well over the 2% target, it needed to be addressed. If the Bank of England continues pushing up rates we could get to a point where a 5% mortgage rate is the norm, and that’s what agents should be telling buyers, it is the norm and not what they should be focusing on,” says McKenzie.
He notes that when comparing historical interest rates and property transaction volumes, there is no evidence that suggests that there is a correlation between the two. “There were more mortgages approved when interest rates were at 15% than there were during the pandemic. The monthly repayments would be higher, but lenders will have an appetite to borrow, and people will continue to move. Rather than focusing on the rate, buyers should be focusing on what they can afford and the cost of the mortgage on a month-to-month basis,” McKenzie comments.
When looking to finance a car for example, buyers are more focused on their monthly repayments than the rates they are being charged, but often don’t apply the same rational to buying a property. When looking to take out a mortgage, should affordability not be a key factor, and deciding whether they are prepared to pay the monthly cost? Other aspects they should be considering is if the cost is fixed and for how long. If it isn’t fixed, what could the cost be if the interest rates do go up and could they still afford to live in the property?
“Of course, the decision-making process will vary depending on whether the buyer is looking for a home or an investment. If an investor is looking for add to their buy-to-let portfolio, the return-on-investment will be at the heart of the decision, but for someone looking to buy a home to live in, the driving force behind their decision will be whether they want to live in the property for the next five to ten years. Property should always be seen as a medium to long term investment, especially when you consider that statistically every homeowner that has kept their property for a ten-year period would have seen an increase in the value of their property. So, rather than focusing on rising interest rates, the question should be about whether the buyer can afford to purchase the property now and be able to afford it in the years to come,” McKenzie concludes.
