Higher interest rates mindset wreaking havoc on housing affordability

interactive investor comments on Zoopla’s rent research and inflation preview.

New research by property portal Zoopla revealed the average UK tenant now spends more than 28% of their pay before tax on rent (as reported by the BBC).

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Commenting, Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “The ferocious run-up in rents in recent history exert an unwelcome strain on the already precarious financial situations of many amid the cost-of-living storm. Those with modest incomes have found themselves wrestling with escalating rental costs, forcing them to sacrifice a sizeable portion of their hard-earned income for a suitable abode. This leaves them with less money for other essential needs or even indulge in discretionary spending.

“Landlords at the end of their fixed-rate mortgage term are not immune from the mortgage mayhem triggered by market expectations that interest rates will rise even higher than initial forecasts and stay higher for longer. They will experience an instant uptick in their outgoings. There is a limit to landlords’ ability to bear increasing costs, and as such many will inevitably pass on the heightened cost burden to tenants.

“The mortgage affordability squeeze also pushes aspiring homeowners to the sidelines until they can make the numbers work. This, in turn, places upwards pressure on rental prices, exacerbating the overall affordability crisis.

“It is becoming increasingly important for tenants to plan ahead to ensure they don’t find themselves in a position where they can no longer afford their rent.”

A lot riding on tomorrow’s inflation data

“There is a palpable sense that a lot is riding on the next set of inflation figures due out tomorrow as the mortgage crisis rages on.

“It has been a case of blink and you’ll miss it when it comes to mortgage deals over the past couple of weeks. Expectations that interest rates could peak as high as 5.75% to combat stubborn inflation has seen lenders pull home loans shortly after launching them. Those that have returned to the market come with a higher price tag.

“Anything less than a significant slowdown in inflation could easily push interest rate expectations to 6%, which would spell disaster for many homeowners approaching the end of their fixed-rate mortgage deal. Paying hundreds of pounds more a month in mortgage repayments threaten to push budgets that are already reeling from the cost-of-living squeeze to breaking point.

“Inflation has come down from its historic highs, although not far enough to stop plaguing the economy and personal finances just yet. But recent weeks has seen supermarkets cut the price of basics, and households will see energy bills go down from July when the new lower energy price cap comes into effect. But for many of those who have recently remortgaged having come off a sub 2% deal, any savings made from falls in food and energy costs do not touch the sides for what is required to offset the heightened repayment burden.

“The government has given a categorical ‘no’ to requests to provide financial support to homeowners as mortgage costs surge, instead opting to pile pressure on lenders to exercise leniency and offer greater support to those struggling to meet repayment obligations. But as the mortgage crisis deepens, only time will tell whether the government bows to public pressure.”