Mortgage Cost Trap - Why Again?

In 1992 I was working as a trusted Mortgage Advisor for a large chain of estate agents working in Brighton & Hove.

I sold mortgages and gave advice, mainly selling endowment policies (please don't boo me).

You see back then that is what every mortgage seller sold, and every mortgage borrower wanted. We sold dreams and the endowment shortfall scandal which later transpired wasn't even given a second thought – ouch sorry!

On Black Wednesday September 16th interest rates grew from 10% at the beginning of the day to 15% by the end of it. Mortgage rates followed the interest rate hikes accordingly, and I recall many people panicking about the spiraling cost of their mortgage payments to be.

Offers from banks and building societies were pulled at the 11th hour and for a good while the entire industry and nation was in turmoil. As clear as day, I recall one borrower deciding whether he wanted to commit to borrowing ￡150,000 based on a 10.5% fixed rate for 10 years.

This is a day that I and many people of my age will never likely forget.

BUT WE DID, AND WE DIDN'T LEARN, DID WE!

What concerns me is for years we have all witnessed the ridiculous house price boom, and at the same time have just accepted that the norm is to see excessive amounts of money lent to borrowers to enable them to buy their dream home.

?The mortgage borrowing guideline used for many years based on 3 x first income plus 1 x second income, or 2.5 x Joint income were simply made obsolete by the ever-increasing house prices.

Banks and Building societies created new affordability/borrowing matrix. Yes, lending criteria had to change to allow people to afford to buy. Afford is the key word. What happened was false affordability rules based on the best-case scenario of low interest rates and rising house prices. ?

Such low interest rates made borrowing affordable, and borrowers just didn’t consider the what-if negative scenarios. ?Who out there can remember any lender underlining the impact on payments should interest rates rise??No, I expect none of you had this pointed out as this wasn’t happening.

The government were also in on the act by their stupid attempts to stop the housing market falling on it’s arse due to Covid, by offering incentives to reduce the cost of stamp duty. What did this do, well it just created a seller’s market with valuation prices being ignored in favour of the highest bidder. Prices artificially rose forcing even greater levels of borrowing.

?Again, this created another mini-boom with such over-inflated prices benefiting absolutely no one except for the lenders and all parties involved in house selling and buying fiasco – conveyancers, surveyors and of course the always greedy estate agents.

Sadly, what I am now seeing is the realised dream of home ownership becoming a nightmare for so many people. This has happened at such a fast pace it’s quite difficult to comprehend.

The cost-of-living crisis is bad enough on its own, but borrowers now face an even bigger challenge; one that I fear will see many very responsible people lose their homes again through no fault of their own.

Interest rates have increased greatly, which according to news reports, will mean average increases of ￡500 per month for borrowers. A ￡500 average means some people will face much higher increases in payment than this, perhaps running into thousands more per month.

If you borrowed in March 2022 based on a 2-year fixed rate of just 0.83%, then just how are you going to cope next year when your lender reverts you onto a variable rate of 6% or more??

If you borrowed ￡200,000* over 25 years, you’ll be facing an increase per month of ￡627.

*￡200,000 was the average size of mortgage lent to borrowers in 2022.

So, you can easily see that the ￡500 per month estimate takes many very much smaller mortgage borrowing amounts into consideration.

What makes this situation even more terrible is that house prices are now falling. They are predicted to fall further, and most major lenders agree on price falls between 5% to 8% throughout 2023. A further 10% fall is predicted by the end of 2024.

Your ￡250,000 property will be worth at least ￡12,500 less than it was at the beginning of the year based on the lower estimate for 2023. Not good news if you are looking to sell, because you can’t afford you newly revised monthly mortgage payment, especially is you only put in a 5% deposit and borrowed 95%.?

If you did, your own equity share has disappeared, and just how long will it be before you are in negative equity? Well based on what’s being forecast, that’ll be much sooner than later. I’m sorry but this is the truth.

Whilst I know this all makes very depressing reading; I feel strongly that it is something that needs to be voiced. We all need to raise awareness and not hide away from the issue that will impact all of us.

I have already lived through one of the biggest home repossession eras in history, and I would like to see someone, namely the government do something to avoid an even bigger one happening again. ?

You encouraged plenty of people to get into this mess Mr Sunak, so perhaps you’d like to provide some real help for them to get out of it??

I feel the government need to do something VERY significant to stop interest rates spiralling any higher. I’m not an economist so I don’t have the answers, but surely someone must come up with a plan that works quickly before too much damage is done. ?At least protect borrowers from imminent threat of repossession orders.

Sadly, the lenders can’t offer much help as they are limited by Bank of England interest rates and the demands of their investors and shareholders. They simply cannot magically just charge lower interest rates for borrowers.?

If nothing is done soon, then every interest rate increase will seriously damage the lives of borrowers, many of whom will already be on the edge of breaking point. ?

Ultimately you can always rebuild a broken housing market (we’ve witnessed this before), but it’s far more challenging and complex to rebuild people’s broken lives.

What matters most is PEOPLE and their WELLBEING..

..NOT the value of bricks & mortar.

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