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Will house prices really crash and what does it mean to you if they do?

BY Harvey Jones

1st Nov 2022 Property

Will house prices really crash and what does it mean to you if they do?

Mortgage rates are increasing, but what does that actually mean? Harvey Jones explores how this may affect homeowners

Years of apparently unstoppable house price growth are coming to an abrupt end as the economy slips into recession and mortgage rates rocket. This will come as a shock to younger homeowners in particular, as many have only ever known a time when property values were shooting up. 

No more cheap money 

The era of the one per cent mortgage is over. The average two-year fixed-rate mortgage now charges 6.65 per cent, while five-year fixed rates charge 6.51 per cent. That’s a 14-year high. Mortgage costs may climb even higher as the Bank of England hikes base rates to curb inflation

"Years of apparently unstoppable house price growth are coming to an abrupt end as mortgage rates rocket"

They have been dire predictions about house prices, with claims they could fall by ten to 20 per cent. Any drop may depend on demand where you live, though. Those who bought several years ago have no need to panic. They are still likely to have plenty of spare equity, given recent breakneck price growth. Prices were rising by double digits as recently as August. 

Recent buyers have more to be worried about. Many risk slipping into negative equity, which is when your property is worth less than the mortgage you borrowed to pay for it. 

Prepare for a rate shock 

Again, there is no immediate danger, provided you do not need to move home, and can afford to service your mortgage. In that case you should sit tight and wait for prices to stabilise. 

Life gets tougher if your mortgage payments have shot up, and you are struggling to pay them. Millions have the protection of a two or five-year fixed-rate mortgage, but this will expire at some point. 

Mortgage payments are increasing as well as household costs

Both mortgage rates and other household costs are increasing, putting people in a tricky position

An interest rate rise of one per cent adds £1,000 a year to the cost of servicing each £100,000 of mortgage. This means a borrower with a £200,000 mortgage would pay a staggering £9,000 a year more if their interest rate jumped from, say, two per cent to 6.5 per cent. That’s an extra £750 a month. 

Many will struggle to find that kind of money, especially as other household costs rise, notably energy bills. 

Early action pays off 

Start by drawing up a household budget to see where you can cut back on less essential spending or generate extra income. If that isn’t enough, don't stick your head in the sand and hope for the best.  Never simply skip a mortgage payment if falling into arrears. That won’t impress your lender. 

"Don't stick your head in the sand and hope for the best"

Instead, contact them to explain your problems. They may be more understanding than you expect. You won't be the only borrower in pain right now. It may offer you a better value mortgage, if it has cheaper deals in its range. 

If you have a mortgage broker, talk to them to compare deals across the market. 

You still have options 

Work out how much you can afford to pay each month, as this will help your lender work out your options.  

One solution is to increase your mortgage term, which would reduce your monthly payments as you are repaying them over a longer period.  If you have a mortgage charging 6.5 per cent over a 25-year term, you will pay capital and interest of £1,351 a month. 

If you extend that to 35 years, your monthly bill will fall to £1,209, saving £142 a month. 

Speak to your mortgage broker about negotiating a better rate

Speak to your mortgage broker to compare deals across the market

The downside is that it will take much longer to clear the debt and your total interest payments will increase, from £205,222 to £307,646. That’s because you are paying interest for an extra decade. However, you can reduce the damage by reverting to a shorter term later on, when you have a bit more money.  

Alternatively, your lender could switch you to an interest-only mortgage

"Work out how much you can afford to pay each month, as this will help you work out your options"

Using the example above of a £200,000 mortgage charging 6.5 per cent over 25 years, it would cut repayments from £1,351 to £1,084 a month, saving £267. Remember, you still have to repay that capital at some point. If none of that works, then you may have to sell your property, and use the proceeds to clear your mortgage. That will not be easy in the current market, but you will probably get a better price than if your lender repossesses your home and auctions it off.  

The problem is that if there is a mortgage shortfall, your lender will expect you to plug the gap from your own pocket. Try not to let it come to that but check every other option first, including getting help from your family or state benefits. 

If you’re on certain benefits, you might get help from the government to pay the interest on your mortgage, through the Support for Mortgage Interest (SMI) scheme. This is a loan that must be repaid. Good luck! 

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