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A Financial Cliff Edge?

The financial forecasts are not looking good. If we take Lloyds Bank’s prediction, which is higher than most other analysts’, they expect inflation at the end of the year to be at 10.7%. In addition to this, the bank is also estimating that unemployment will rise to somewhere around 5.5% by early 2024.

Whilst these are just estimates, and we can’t know yet what will happen, what is clear is that most mortgage borrowers are going to face huge hikes in energy bills on top of the increase of the Bank of England rate. As we saw on Thursday 3rd November, the appointment of Rishi Sunak and the ongoing presence of Jeremy Hunt didn’t stop the Bank of England raising the interest rates by 0.75%, with comments that there will still be further rate rises to come.

A scaremongering headline in The Guardian last week read: “Bank of England warns of longest recession in 100 years.” Whether that’s true remains to be seen, but we now know that there will be both tax increases and spending cuts in equal measure, and there is certainly the possibility of an incredibly difficult few years ahead.

Mortgages

Even if you haven’t turned on the central heating yet to limit your exposure to the energy increases, there’s no escaping the mortgage.

The best rates for a 35 year old with a £250,000 mortgage are coming out at 5.3-5.8%, according to Money Supermarket – over twice what they were 12 months ago. If the majority of mortgage borrowers are on a fixed rate mortgage, when this term ends are they going to be able to afford the repayments? It seems certain that not everyone will. On the back of these figures, William Chalmers, Lloyds Bank’s Chief Financial Officer, stated that because of these increasing borrowing costs, house prices will fall by up to 10%.

Banks would normally make more money as interest rates rise, but there is a definite concern that borrowers will not be able to afford to pay their mortgages, which will lead to repossessions and also more property being on the market as buy to let investors pull out.

These two factors combined will result in the potential double digit fall in house prices, and in fact the estate agents we speak to are saying that there is more stock available, and it is more appropriately priced. It seems that the affordability of mortgages and increased mortgage rates will be the real life issue.

Further to this, the Guardian newspaper has recently published an article stating that buy to let owners with smaller portfolios are on a “financial cliff edge” as rising mortgage costs make their properties unprofitable. This means that they may either be forced to sell, or increase rents, which will further pile on the downward pressure on house prices.

This is where it seems we need a really good balance. Yes, the government has a gaping hole in the country’s finances, but to increase prices too much will only compound the problem, not solve it. If things get too expensive it will become inevitable that people will simply be unable to pay off their debts and bankruptcies will flourish. We need to find that happy medium, where we can recoup costs whilst still supporting people through these difficult times. What that solution is, however, still remains to be seen.

The only thing we can be sure about is that the remainder of Autumn is going to be a very challenging time for mortgage payers, and once the increase in energy prices kicks in, the Winter could be even worse.