Interest Rate Hike Could Propel Negative Equity As Property Values Continue To Decline

Hello there,

Here's our newsletter for May (the force be with you).

The Bank of England increased rates earlier this month and hinted at a possible hike again this year to curb the effects of inflation. We don’t agree, but it is what it is.

Before we slide into the hot stuff, there’s something we want to re-share with our LinkedIn fam.

Our team was invited to attend the #CREtechLondon2023 conference and attend we did. ??

It was so good to share the room with industry leaders and learn from them.

We are more than honoured to be recognised at this level, and we would like to thank you for backing us up by being the best subscribers ever. ??

Now, let’s go!

Housing Market Updates

• The Bank of England raised interest rates to 4.5% earlier this month, the highest level in 15 years. This is the 12th consecutive rate hike by the Bank of England since 2021, as they try to slow inflation.

• The higher rates will make it more expensive for people to borrow money, which could slow economic growth. However, the Bank of England believes that it's necessary to take action to bring inflation under control.

• Brian Murphy, head of lending at Mortgage Advice Bureau hopes there won’t be any more hikes.

“There will be hope that we have nearly reached the summit of the interest rate mountain and will shortly start our descent toward a lower cost of borrowing.”

• However, the Bank of England expects to increase the rate once more to 4.75% and also expects inflation to come down to 5% by the end of the year.
• According to Halifax, the average house price is ￡286,896. This is only up by 0.1% from last year, suggesting that the real value of houses is in a rapid decline.

Food for thought: What happens when the value of a home reduces while the mortgage rates increase?

Well, when the value of homes reduces, it means that homeowners owe more on their mortgages than their homes are worth. This is known as being "underwater" on your mortgage. In other words, it will result in negative equity.

When mortgage rates increase, it means that homeowners have to pay more interest on their mortgages. This can make it more difficult for homeowners to afford their monthly mortgage payments, especially when the mortgages are up for renewal. (More on this below!)

• According to Zoopla, first-time buyers were the most resilient in last year’s housing crisis. Most of them turned to homeownership from being renters because of steeper rent increases.
• In fact, first-time buyers were the biggest buyer group in 2022, accounting for 36% of all property purchases. This was up from 29% in 2021.

• However, first-time buyers in 2023 will need to earn an additional ￡7,500 to afford the same house they could buy in 2020.
• But guess what? The Office for National Statistics reports that wages have only increased by ￡4,800 since 2020. Not to forget the cost of living increases!
• Zoopla’s research also finds that the average deposit needed by a first-time buyer for a house deposit has also increased.

?? 3-bed home costing ￡230,000 would require a deposit of ￡34,500 (??￡5,000).

?? 2-bed home costing ￡210,000 would need a deposit of ￡31,500 (??￡3,000).

• Talking about deposits and mortgages for first-time buyers, here’s something very interesting: Deposit-free mortgages are back.
• It is making a return for the first time since the financial crisis of 2008. Are you thinking what I am thinking? ??
• Skipton Building Society launched a 100% mortgage exclusive for renters above 21 years of age. Here are the eligibility requirements:

? Buyers must pass a credit and affordability check

? Buyers must provide evidence of at least 12 months of on-time rent payment.

• In a deal like this, the monthly mortgage payment must be less than the average rent over the past 6 months. It does sound good at first glance. But, be warned, say experts as it poses a risk of negative equity for the borrower.

• Here are a few things you should know about deposit-free mortgages.

With a zero-deposit mortgage, the loan-to-value (LTV) ratio is 100%, meaning the loan amount equals the full value of the property. It's important to note that a higher LTV increases the risk of negative equity. This means that even a slight decrease in house prices can result in the borrower owing more on the mortgage than the actual value of the home itself.

However, negative equity in itself is not necessarily a negative situation unless you decide to sell or refinance the property. Therefore, its impact largely depends on the purpose behind your home purchase. If you intend to acquire your first home through a zero-deposit mortgage, please continue reading for valuable advice on how to ensure you won't have any regrets.

• If you lack a significant amount of money for a mortgage deposit, opting for a zero-deposit mortgage could be the most suitable option for you to become a homeowner at this time. Especially when renting is more expensive than a monthly mortgage.?
• And guess what? Combining Adjoin's rent now buy later scheme with a zero deposit mortgage can potentially create a win-win situation if you ultimately decide to purchase the property. Here’s why:

1. You try the property before you buy it so you feel more secure about its suitability. This helps you make a concrete choice so that even in case of negative equity, it won’t affect you as you will be home and happily satisfied.
2. If you opt for our Share In The Upside offering, then you would get a discount on the purchase price. This discount will act as a cushion that protects you from negative equity even if you get a zero-deposit mortgage.
3. For example, say the market value at the time of purchase is ￡600,000. But with the Adjoin discount, you buy the house for ￡580,000 using a zero-deposit mortgage. In this case, the value has to drop by more than ￡20,000 for you to have negative equity. Without the Adjoin discount, even a ￡1 fall would result in negative equity, in this case.

• Now that is what we call a sweet deal here at Adjoin Homes. DM us if you’re interested. *Luna, the Adjoin owl, whistles in the background*
• Of course, there is no restriction whatsoever in the financing you can choose if you decide to buy at the end of your Adjoin tenancy. Low LTV or high LTV mortgages all can work, depending on your circumstances.

??'Hood in the spotlight:?Salford, Greater Manchester

Peel L&P has submitted plans for a 750-home development in Salford, Greater Manchester.

The development, which is called Salford Central, will be located on the site of the former Salford Royal Infirmary. The scheme will include a mix of apartments, houses, and townhouses, as well as commercial and retail space.?

This will provide a range of housing-related benefits for the people of Salford:

• Increased housing supply: The development will provide much-needed new homes for people in Salford, including a mix of affordable and market-rent homes, which will help to meet the needs of a range of households.
• Improved quality of housing: the new homes will be built to high standards and will offer a range of amenities, such as gardens, parking, and communal areas. This will improve the quality of life for residents and make Salford a more attractive place to live.
• Boost to the local economy: The development is expected to create around 2,000 jobs during construction and 1,000 jobs once completed.

The development is supported by Salford City Council and is expected to be completed by 2026.

Read more about this here.

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