The current and much-talked-about cost of living crisis is starting to cause people all over the UK to really feel the pinch in both personal and household budgets. It’s arguably one of the biggest financial squeezes the country has felt since the 1950s. No matter what your salary, you are likely to have seen rises in your energy bills, food, clothing and fuel costs, resulting in a dip in your disposable income.

The cost of living crisis may make buying, selling or remortgaging your home seem difficult for the foreseeable future. But how exactly? And what could you do to alleviate some of the financial pressures? Let us explain.

What has caused the cost of living crisis?

There are a few factors that have played into the emergence of the cost of living crisis. Firstly, inflation. This has continued to rise throughout 2022 with the cost of food, fuel and energy all increasing whilst wages and salaries have largely stayed the same.

The world is still feeling the pressures and after-effects of the Covid-19 pandemic. Governments have pumped billions into their economies over the past couple of years to mitigate some of the effects of the pandemic. However, this has inevitably led to inflationary pressure.

Not only this, but global supply chains have struggled to recover from the forced shut-downs and staff shortages caused by the pandemic. This has resulted in shortages of all sorts of essential products and materials. These shortages, along with a sharp increase in global shipping costs, have added to the cost of finished goods and raw materials when they have eventually been delivered.

The first quarter of 2022 also saw the start of the war in Ukraine and the imposition of sanctions by the EU, UK and US on Russia. As a consequence of these sanctions, we have seen energy prices rocketing due to restrictions on the supply of Russian gas and oil. This has increased the demand for, and cost of, supplies from other sources worldwide.

How have house prices been affected by the cost of living crisis?

2022 was set to be a ‘bumper year’ for the property market with cheap, easily accessible mortgages available. There was also the promise of an increase in the supply of new houses following a relaxation of some of the planning rules.

However, the significant rise in the rate of inflation at the start of this year has caused the Bank of England to increase its Base Rate. This has made borrowing more expensive. Combined with this, there has been a major increase in the cost of raw materials for house builders, such as steel, timber and bricks. This has caused the cost of new homes to rise significantly.

The Covid-19 pandemic brought about something of a change in house buying activity. Home working fuelled an increased demand for out-of-town homes and properties with larger gardens and home office facilities. However, this post-pandemic rise in buyer activity has begun to dwindle. Workers have started to return to the office commute and are feeling the financial pressure of the cost of living crisis. Many people are deciding that now is not the time to commit to large property purchases.

That being said, there does still seem to be a disproportionate number of people looking to buy a property compared to those selling. With the number of available properties low, we are continuing to see an imbalance between demand and supply. This imbalance is helping to maintain high house prices. This is expected to continue to be the case throughout the rest of the year. This might be good news for sellers, but not so great for buyers. Particularly not for first-time buyers.

Cost of living crisis and mortgage rates

Inflation has been one of the major causes of the current cost of living crisis. The increase in the rate of inflation has caused the Bank of England to increase its Base Rate. This in turn has caused mortgage lenders to increase their borrowing rates. This makes getting on the property ladder increasingly difficult for some first-time buyers.

Mortgage lenders are having to look more closely at borrowers’ personal outgoings when calculating mortgage affordability. The rise in fuel, food and energy prices is likely to have increased the amount of money coming out of your bank account each month and therefore restricted your affordability. Lenders will also be mindful that interest rates may need to rise higher still during the year if inflation continues to rise. They may need to factor a greater margin into some of their affordability calculations to allow for this possibility.

Whilst lenders will be adjusting their criteria in line with the increase in living costs to ensure that deals offered will remain affordable to borrowers, there are some things you can do to help make your application more attractive. Whilst it is much easier said than done, it’s a good idea to try to provide a larger deposit. Perhaps you could seek help from family members. This could allow you to access cheaper mortgage deals with a lower loan-to-value threshold, making your borrowing more affordable. You might also consider extending your mortgage term. This should see your monthly repayments come down, improving your affordability.

Will my mortgage be affected?

If you already have a mortgage, you may be wondering whether you will be affected by rising mortgage rates. For most borrowers, the answer to this is yes, you will. Although when you will be affected will depend on the type of mortgage that you have.

Those borrowers with tracker mortgages or with variable rate deals will feel the effects of rising mortgage rates first. Their interest rates tend to move up and down in line with the Bank of England’s (BoE) Base Rate. Tracker mortgage deals will respond immediately to interest rate raises. Variable-rate deals may respond a little more slowly. Lenders might take a little while to decide when and by how much to amend their variable rates.

Those on fixed rate deals will initially be protected from rising rates. However, once those deals expire, those borrowers will then be subject to the prevailing market rates at that time. If you are looking to get a mortgage or looking to remortgage, it may be worth considering securing one of the current fixed rate deals. Just be mindful of the possible early repayment charges when remortgaging your current deal.

What does the future hold?

There is much speculation about what the future will hold for the economy for the remainder of 2022 and beyond. House prices are likely to continue to creep up but eventually, level out eventually as the cost of living forces many wannabe home-movers to pause their plans to buy a property.

UK interest rates, although currently the highest they have been since 2008, are still well below historic average rates. They could well rise further if inflation is seen to continue its current upward trend. This could start to cause severe hardship for borrowers, particularly for those who took out large borrowing commitments on the basis of historically cheap rates.

Our advice on easing the strain on your pocket

It’s impossible to predict the future with any degree of accuracy, but we advise you to future-proof your finances as much as possible by ensuring that your current arrangements are robust.

Here are our tips:

• Pay off any short-term debt you have as quickly as possible. We suggest prioritising the ones with the highest interest rates.
• Restrict any new borrowing wherever you can.
• Review your longer-term borrowing such as existing mortgage commitments to ensure that you are on the best deal for your circumstances and that it is appropriate for your budget. A good financial adviser and mortgage broker such as us here at Mortgage Light will be able to support you with this assessment and advise on possible alternative funding options.
• Shop savvy – make a list of all your regular outgoings such as the weekly food shop and see if you can buy cheaper elsewhere. Making little changes can help make a difference to your finances.

If you are worried about getting a mortgage or managing your mortgage during these difficult times, you’re not on your own. Whether it’s just a friendly chat with an expert who can break down and explain these confusing market changes to you, or maybe you need some help and guidance on how to make your mortgage work better – we’re just a phone call away. Remember, Mortgage Light are always here to help.

Just call 01908 597655 or contact us via our website and one of our friendly team members will be in touch.