How to future proof your housing costs to cope if house prices dropped

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We're in political limbo, and hear repeat warnings that a 'no-deal' Brexit could cause house prices to fall by up to 35% over three years in a worst-case scenario.

Revealing details to the government of the Bank's 'stress-tests', Carney said they aim to ensure the UK's largest banks can meet the needs of the country, "even through a disorderly Brexit ".

Carney's comments were not a forecast but a briefing on preparations for a worst-case scenario. The banks passed tests set beyond what might reasonably be expected to happen, providing reassurance that the UK financial system can cope with whatever happens post-Brexit.

But, how would you cope with a fall in house prices?

First-time buyers

First-time buyers may be hoping that house prices do fall so they can buy a property with a smaller deposit, and by borrowing less.

However, if there was a big drop in house prices lenders would try to protect their profit margins. If they were lending less to new borrowers they could raise interest rates to increase profit margins on funds loaned.

A 'no-deal' Brexit would also provide a financial shock to the UK economy which could see the Bank of England raise interest rates anyway, adding to the cost for first-time buyers.

Existing homeowners

If you already own a property, then the impact of a house price fall depends on your current circumstances and future plans.

If you plan to stay put, then as long as you can afford your mortgage repayments, a fall won't have a major impact. If you have a fixed rate repayment mortgage deal, your repayments will stay the same. But if you're on a variable rate, they could go up if the Bank's base rate rises (A base rate is the interest rate that cental banks, like Bank of England, charge commercial banks for loans).

However, if you plan to move home, perhaps to a bigger property because of a growing family then something called 'negative equity' could be a factor. This is where the amount you still owe on the mortgage is worth more than the property's current value. This is usually caused by falling property prices.

Although if you move house within the same area, then any property you plan to move into is likely to have fallen in value by the same proportion. Because of the timing of your current property purchase, you'll probably receive less than you paid for it which can make it harder to fund a move to a bigger property.

You may have to buy in a cheaper area to get a bigger property or buy a similar sized property with scope for extending that you can fund in the future. Alternatively, you could wait for house prices to recover.

Latest house price index news

Nationwide's House Price Index (HPI) for June, found annual house prices growth in the UK remains below 1%.

However, there are regional variations. Prices are rising by more in the North of England than the South but prices in the South are still roughly double that of the North, Scotland, and Wales, while London house prices are triple the level of these regions.

How would an interest rate rise affect you?

Further uncertainty for homeowners is what will happen to interest rates post-Brexit. Even before the Brexit process began the Bank of England warned homeowners to expect a gradual rise.

The Brexit process - however it pans out – is unlikely to change that. A 'disorderly' or 'no-deal' Brexit could increase the negative impact on the UK economy which could, in turn, speed up interest rate rises. However, things could turn out better than anticipated, which could keep interest rates stable or rising at a slower pace.

Whatever happens, it pays to be prepared and to understand how varying interest rate rises' impact your mortgage repayments.

An example:

If you owe £150,000 and have 20 years left on your repayment mortgage and you're paying 3%, you'll repay £832 a month and £199,627 in total (£150,000 capital and £49,627 in interest).

If rates rise by 0.50% to 3.50%, your monthly repayment will go up to £870 and you'll repay £208,844 in total, (£150,000 and £58,844).

If rates shot up quicker than expected, to 5%, your repayments would be £990 a month and total repayment would be £237,656 (£150,000 and £87,656 in interest).

This illustrates the big impact of interest on overall repayments.

How to prepare for a house price fall or a rise in interest rates

To keep your rate low you need to increase the equity in your property, the proportion of the property you own compared to the loan, known as the loan-to-value (LTV) ratio.

If you have £50,000 equity on a £200,000 property that means you own 25% of your home, so your LTV ratio is 75%.

Many first-time buyers can only get a deposit of 10%, with a 90% LTV ratio so don't qualify for low mortgage rates (unless they're using Help to Buy mortgages). The lower the LTV ratio, the better the mortgage rate you'll be offered. Owning 40% of the property, with an LTV of 60% or less, will open up the best rates on mortgages.

To get there quicker you can make overpayments on your mortgage, usually up to 10% annually. Don't overpay too much though because penalties can be severe. This is often a good way to insure against falling prices, and rising interest rates.

There are other ways to guard against property market and interest rate 'shocks' such as saving up for a buffer fund to help cover increased outgoings.

If you have other debts, try and pay them off as quickly as possible so if your mortgage costs go up, you have less strain on your income from other sources. For tips of how to prioritise your debts, try this quick read.

Finally, increasing your household income helps finances in all ways and means you'll be more likely to make overpayments and reduces your earnings to borrowing ratio. Consider whether you could be earning more from your savings, to bring a little more cash in.