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Monday, October 25, 2021

Five charts that show why higher inflation will hurt your house price

A Bank Rate hike to 2pc would bring mortgage rates of around 4pc and trigger a jump in households struggling to repay their mortgages, said Mr Wishart.

Restrictions on lending and affordability criteria in the wake of the financial crisis have meant that the British property market has improved safeguards. Before the crash, one in six borrowers only had 10pc equity in their home, Mr Wishart said. That has dropped to 3pc. “As a result, homeowners have more skin in the game and a bigger incentive to keep up mortgage repayments.” Stress tests are also much more rigorous making repossessions less likely. 

Nonetheless, higher rates could coincide with a sharp slowdown in the economy, leading to job losses. “That would cause some borrowers to fall into arrears and repossession would rise even if they have a significant equity stake in the house,” said Mr Wishart.

British homeowners would be hit harder

Rate rises pose a bigger risk to the British housing market than in other countries such as the United States because a larger share of homeowners here are on variable rate mortgages, said Vicky Redwood, of Capital Economics. 

Variable rate mortgages are periodically adjusted according to what the Bank of England does, meaning increases would quickly translate into higher costs for homeowners. Coupled with the rapidly rising household bills, this could put pressure on affordability and, in turn, increase the likelihood of forced sellers.

The British market has been moving towards fixed-rate mortgages. Between April and June this year, 6pc of new mortgages issued in the UK were on variable rates. In the US, the share was 3.6pc. 

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