Mortgage Shock Awaits UK Homebuyers After Pandemic Tax Break – Yahoo Finance Australia - 24line

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السبت، 3 سبتمبر 2022

Mortgage Shock Awaits UK Homebuyers After Pandemic Tax Break – Yahoo Finance Australia

(Bloomberg) —

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The UK’s tax holiday on property purchases during the pandemic seemed like a dream chance to buy a home. For many who did, it may soon look more like a nightmare.

A huge cohort of purchasers opted for cheap two-year mortgages and are due to refinance by September 2023. But borrowing costs have risen to a multi-year high, meaning their new monthly housing payments may be 25% higher, or even more.

The relief on the stamp-duty levy ran from July 2020 to September 2021. About 42% of borrowers in that period, which includes those remortgaging, fixed for only 24 months, according to data from UK Finance.

The ticking clock means homeowners are quickly having to come to terms with something they haven’t dealt with in years — sharply higher interest rates and a risk of a housing correction. Traders are betting the Bank of England will raise its key interest rate by 250 basis points to 4.25% by March. A year ago, the benchmark was just 0.1%.

That’s just one of multiple shocks battering consumers right now as energy bills surge and inflation jumps above 10%, the fastest in four decades.

Adam Lee, a finance worker, bought a home with his partner in the southwest London suburb of Kew in March with a two-year fixed-rate mortgage of 2.25%. He’s already worried about his deal expiring.

“There was a house we liked and it was on the market only for a day, so we went for about 10% above the asking price,” the 33-year-old said. “The main problem we have is that the mortgage is only fixed for two years and when we have to refinance that might cost us more like 6%.”

Home buyers in the UK typically fix for a relatively short number of years. During the stamp duty holiday, more than 600,000 homeowners opted for two-year terms.

Rates Double

The average two-year fixed-rate mortgage has almost doubled to more than 4% in the past two years, according to financial data provider Moneyfacts Group Plc.

While few would expect to get a 2% rate forever, applying those figures offers a stark illustration of the scale of the growing financial burden. Somebody borrowing £250,000 ($289,000) on an average two-year fixed in August 2020 would have been on track to pay almost £320,000 pounds over 25 years, compared with about £400,000 if they did so now, and £483,000 if pricing rises to 6%.

Risks to the UK housing market are mounting, and not just from higher interest rates. The cost-of-living crisis, plunging consumer confidence and weaker economic growth will all take a toll too.

Recent first-time buyers are particularly vulnerable to falling prices as they have built up less equity in their homes. The stamp duty holiday saw them jump into the market in droves, buying at the highest rate in at least 16 years in 2021, according to UK Finance data.

Things could soon turn negative for them. Broker Hamptons International said Thursday that home prices are likely to decline if the central bank’s base rate exceeds 2.5%.

On Friday, HSBC Holdings Plc warned that the UK is on the “cusp of a housing downturn.” Starting in the fall, demand will probably plunge 20% over the following year, it said. Average values for existing properties will decline 7.5%, excluding central London which will suffer a drop twice as large.

“This is getting very scary,” property market analyst Neal Hudson wrote earlier this week. ”The housing market is still booming but time is running out.”

While a 4% base rate might suggest a return to “normal” conditions when compared with previous high-rate periods, the situation is far different now, and borrowers are very exposed because mortgages are at a much higher multiples of income, according to Hudson. He estimates that repayments under the actual 14% rate in 1980 are equivalent to repayments at just 3% now.

Another model he uses suggests that at a 4% mortgage rate, prices would be nearly 40% overvalued.

In addition to higher interest rates, the choice of mortgages is reducing. Providers are already tightening lending criteria for households with income of £40,000 or less and being more flexible with those earning more than £100,000, said Mark Harris, chief executive at wealth adviser SPF Private Clients.

Top earners can now be offered loans of as much as 5.5 times salary compared with 4.5 times previously, he said. “It isn’t good news for the first-time buyers.”

The change in lending multiples is part of an effort to prevent a slump in prices by facilitating high earners and discouraging first-time buyers, said another broker, who asked not to be named because he deals with lenders on an ongoing basis.

Others disagree. Ray Boulger at Charcol says the changes are so that lenders can stay within regulators’ rules on mortgages.

Meanwhile, products such as low-deposit mortgages and the government’s Help to Buy loan guarantees, which helped more buyers get on the property market without needing financial assistance from family or friends, are disappearing. Lenders are starting to pull some of the riskiest loans, according to Moneyfacts, as part of a wider reduction in their offerings amid surging demand from worried homeowners looking to fix their payments.

An analysis of interest rates of the last 30 years shows that you are better off not fixing more than 90% of the time, according to Mayad Rassam, a real estate derivatives expert at Vedanta Hedging. Still, the rationale to do so is strong.

“Fixing mortgage rates is insurance,” Rassam said. “It gives peace of mind and protection, but at a cost. Most people should take out that insurance because chances are they can’t afford not to.”

(Updates with additional estimates on payment stress in 16th paragraph)

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