The mortgage market is going through a fair amount of upheaval at the moment which is having a knock on effect on the housing market that we’re only just starting to see the signs of. Here’s a quick summary of what’s going on.

What’s happening?

The rising interest rate is making mortgages more expensive for property owners, much more expensive. 

A big part of people’s monthly mortgage payments is paying the interest on their loan. Some people’s mortgages are “interest only” where the only thing they pay each month is the interest on the loan. When the interest rate goes up, so does the cost of having a mortgage. The interest rate has been below 1% for a long time but now it’s on the way to an expected rate of 6% next year which is going to hugely increase the average monthly mortgage repayment.


Are all mortgages affected?

No, not initially. Millions of mortgage deals in the UK are currently on a fixed rate deal. When these owners took mortgages out, the deal came with an initial period of 2-5 years where the interest rate on their mortgage is fixed at, say, 2.5%. Until the initial period of these deals expire, their monthly mortgage payments will not change. But when the initial periods come to an end, unless something significantly changes in the mortgage markets, people will be paying a lot more for their next mortgage deal. Some owners will have fixed rate deals ending now and the average fixed rate being offered today on new mortgage deals is above 6%.


What’s going to happen on the housing market?

Already there’s been a significant drop in the number of prospective buyers in the market. This is because buyers can no longer get the mortgage deal that they would have been offered a few weeks ago. Buyers are holding off because they can no longer afford to borrow the amount they need or, because they are waiting to see what happens in the market before buying a property.


House prices will decrease

It’s not all doom and gloom for potential house buyers. Although mortgages will cost more, the amount that they will have to pay for a property is likely to come down. In Edinburgh this year, we’ve seen properties selling extremely quickly for sometimes 20%-30% above the home report valuation. This was driven by fierce competition between prospective buyers. With fewer buyers in the market and increased mortgage costs, it’s likely now that we’ll see many more fixed-price properties on the sales market and properties likely to be selling for less than their home report valuations. Properties will be on the market for longer and buyers will have more choice. 


How will the rental market be affected?

The total number of properties in the rental market will start to grow. This is good news for renters as the total number of properties in the private rented sector (PRS) has reduced over the last 2 years. This has been due to some questionable policies from the Scottish Government and a red hot sales market making selling a more attractive option for many owners. 

That’s all changed now. 

Many owners will choose not to sell their properties for less than they think it’s worth so will rent the property out while they wait for the sales market to recover. There will also be cases where owners have enough of paying the costs of their empty property on the sales market, where it might sit for months without selling, and will choose to rent the property out instead so they can cover their costs.

It’s not clear if the influx of more properties to the PRS will be enough to cool the frenzy that we’ve seen over the last 2 years. It’s the case now where the number of prospective tenants is so much higher than the number of available properties but it looks like tenant demand will increase next year, too. This is because the difficulties in the mortgage market will prevent  many would-be first time buyers from getting on the property ladder. People will end up renting for longer which will increase tenant demand in an already overwhelmed PRS. 


Advice to property owners and tenants

The financial turmoil that’s started in the UK housing market is not good news. It means nearly everyone is going to have to change whatever property plans they had previously since the financial situation is changing significantly. It’s going to take time but options will emerge for prospective buyers and sellers alike as the dust settles and we all adjust to the new landscape. 

If you want to discuss your own situation relating to your property, contact our team at [email protected] to arrange a no-obligation discussion about your options.