The pandemic has created a rather contradictory situation in the housing market. On the one hand, sales of residential property have been booming. On the other, the pandemic has created, or exacerbated, financial challenges for many homeowners. This could lead to some interesting times over the next year or two. Here is a quick guide to what you need to know.
COVID19-specific measures have ended
For the time being, COVID19-specific support measures have ended. This means that mortgage-holders in financial difficulties need to use standard processes for resolving them. Hopefully, in most cases, this will simply mean applying to their lender for some form of support rather than insolvency, bankruptcy and/or foreclosure.
It is, technically, possible that the government could reintroduce COVID19-related support measures. It is, however, difficult to see any circumstances in which they would do so other than a significant upsurge in cases.
Quite bluntly, the UK must hold a general election by 2nd May 2024. It, therefore, seems reasonable to assume that the government will want the country to be back to normal in plenty of time for the start of the next election campaign. This means dealing with the economic effects of the pandemic (and Brexit) and getting the economy rolling again.
Interest rates could rise again
If the combined impact of COVID19 and Brexit leads to price rises, then the Bank of England will be faced with a hard choice. Option one is to raise interest rates to take inflation even though this would hurt borrowers. Option two is to allow inflation to rise above its designated margin of error even though this would potentially hurt everyone.
With the base rate currently at 0.1%, the Bank of England may decide to put borrowers under (more) pressure to spare the economy the wider effects of inflation. This approach would presumably go down well with those who had managed to save during the pandemic. How much it would hurt borrowers would largely depend on their situation.
Borrowers on fixed rates would only see their mortgage repayments go up at the end of the fixed term. They could, however, still find themselves under pressure if they also had variable-rate debt such as credit-card debt. Borrowers on variable rates or coming to the end of their deal would feel the impact much more quickly.
That said, the real-world impact of this would depend largely on the bigger economic picture. If price inflation was mirrored by wage inflation then borrowers in work should break even (or thereabouts). Of course, that will not help borrowers out of work or borrowers on fixed incomes (e.g pensioners). If it’s not, then lenders could find themselves dealing with a lot of distressed borrowers.
Lenders may become more cautious
The UK is, hopefully, now on the road to recovery from COVID19 (and Brexit). The problem is that, as yet, nobody really knows whether that road is going to be a superfast highway or a pothole-filled off-road track full of sharp bends and dangerous bumps. Similarly, nobody knows if the UK is going to have to navigate it in good conditions or bad ones.
If the UK can set itself on a clear path to recovery, even if it’s a long one, then everyone, including lenders can make plans with reasonable confidence. Until then, however, lenders are essentially going to have to feel their way forward, responding to circumstances. It would therefore hardly be a surprise if they chose to proceed with great caution.
This might not be a problem for those with large deposits and/or plenty of equity in their current home. It could, however, become a major problem for borrowers in less fortunate positions. In particular, more recent buyers with minimal equity could find themselves unable to remortgage and hence stuck on their current lender’s standard variable rate.
At the moment, it appears to still be time for optimism, though with new variants and talk of lockdown measures, considering a fixed rate could be a conversation to have sooner rather than later. Please get in touch if you’d like advice.