"Monthly expenses are anticipated to increase by at least £500 for the roughly one million families who are scheduled to remortgage between now and 2026."
The cost-of-living crisis has become a central concern for individuals, families, and businesses alike. Rising prices for essential goods and services, coupled with stagnant wages, have left many grappling with financial uncertainty.
The question on everybody’s lips is: ‘Where do we stand on the cost-of-living crisis? Is it here to stay?’
Understanding the cost-of-living crisis
The cost-of-living crisis is a situation where the cost of essential goods and services significantly outpaces the growth of incomes, making it increasingly difficult for individuals and families to maintain their standard of living. While it has been a recurring issue in various forms over the years, the crisis has gained renewed attention in recent times, exacerbated by factors like inflation, supply chain disruptions, Brexit, and the economic impacts of the Covid-19 pandemic.
The impact on mortgage customers and renters
The cost-of-living crisis presents formidable challenges for mortgage customers and renters, including:
Higher interest and mortgage rates
High inflation rates have led to increased pressure on the Bank of England to continue to raise interest rates. However, after 14 long months of hikes, the latest hold in the headline rate of 5.25% will offer much needed relief to homeowners. This announcement should offer a glimmer of hope that we’re nearing or have reached the peak, as well as providing a moment of respite for mortgage holders in the long-running interest rate cycle. Fixed rates however continue to fall, which is good news, and the pause in rate increases will also be helpful for those on variable and tracker rates.
Mortgage customers are feeling the pinch of rising costs, primarily through increased monthly mortgage payments. As inflation erodes the purchasing power of money and causes the BoE to raise rates, the value of mortgage payments rise, putting additional strain on household budgets.
Indeed, as reported by the BoE, monthly expenses are anticipated to increase by at least £500 for the roughly one million families who are scheduled to remortgage between now and 2026. Furthermore, according to Which?’s latest Consumer Insight Tracker, 79% of mortgage customers and 81% of renters mentioned that they were worried about rates and housing costs.
Inflation
In a Censuswide study, 73% of respondents claimed they do not have control over their expenditures, with 47% blaming the cost-of-living crisis as the main culprit. Despite the fact that inflation dropped to 6.8% in August, 48% of those polled reported an increase in expenditure in the three months prior to August, with the cost of food, petrol, and other necessities like toiletries cited as one of the primary causes.
Central banks and policymakers play a crucial role in controlling inflation. If they succeed in managing inflationary pressures, the cost-of-living crisis may gradually ease.
The latest fall in inflation to 6.7% will fill the nation’s mortgage holders with hope that the tide has well and truly turned. Significant month-on-month falls ramp up the likelihood that the Bank of England will hold off on increasing rates right now. This will likely be a breath of fresh air for those on variable rates or trackers, especially if this means that interest rates are near, or at, their peak.
This is further supported by the prediction that the base rate may reach 5.75% by early 2024 , which indicates that should there be further increases, they won’t be significant.
There is also better news for those looking to remortgage and, indeed, prospective buyers. This is due to the steady decline of swap rates, meaning many lenders have reduced rates on various deals. Although swap rates remain high in comparison to the past decade, they are some of the lowest rates we’ve seen in the past year.
This is positive news for mortgage customers, as it means affordability has improved and outgoings are becoming cheaper compared to just a few months ago. It also improves consumer confidence, providing more options for mortgage deals, alongside the ability to remortgage at lower rates than we have seen over the past year.
Wages
Real wage growth, or the increase in wages adjusted for inflation, is a critical factor in addressing the cost-of-living crisis. According to new Minimum Income Standard (MIS) research released this September, an individual must make at least £29,500 annually to maintain a decent quality of life in 2023, while a couple with two children must make £50,000 between the two of them.
If wages begin to outpace inflation, individuals and families may find it easier to manage rising living costs. Inflation being below average wage growth could mark a turning point in the cost-of-living crisis, and potentially signal good news for mortgage customers, with lenders already reducing their rates and more manageable payments becoming a reality.
Tightened affordability when buying and renting
The cost-of-living crisis can make homeownership less affordable for prospective homebuyers. As the prices of everyday essentials rise, the ability to save for a deposit diminishes. If those potential homebuyers are currently renting, they still face the prospect of tightened affordability, as landlords are forced to put rents up to combat the increasing costs of their mortgage.
For instance, the average UK house price was £288,000 in June 2023. This is £5,000 higher than the same month a year previous, but £5,000 less than the peak in November 2022.
Also, according to the Office of National Statistics (ONS), private rent costs rose 5.2% in England, 6.5% in Wales, and 5.7% in Scotland (in the 12 months leading to July 2023), the highest annual changes in rental costs since records began (2006, 2010, and 2012).
Policy response from governments
Government policies, such as targeted financial support, housing initiatives, and measures to address income inequality, can influence the duration and severity of the crisis. Political and economic decisions will also play a significant role in determining its trajectory.
The payments made to low-income households for cost of living are one instance of policy response from the government in this situation. These cost-of-living payments, according to MIS (study supported by the Joseph Rowntree Foundation), fall short of boosting living standards to levels that are acceptable. As an illustration, a couple with a pair of children in which one parent earns the National Living Wage while working full-time and the other is jobless reaches 74% of the Minimum Income Standard.
The same pair only makes up 77% of MIS even after getting cost-of-living allowances from the government. This demonstrates plainly that more must be done to assist individuals with lower incomes through the cost-of-living crisis.
Impact on the wider housing market
The cost-of-living crisis isn't confined to households alone. In fact, its reverberations extend far beyond individual finances and into fundamental aspects of our economic landscape, including the housing market.
For example, the crisis has the potential to worsen an already-lacking housing supply. As construction costs rise, developers may slow down or halt new housing projects. This exacerbates the already strained housing market, leading to higher property prices and increased competition among homebuyers.
With recent news surrounding the withdrawal of proposed nutrient neutrality rules, and the continued potential block of more than 100,000 homes across the UK, this lacking housing supply is likely to worsen. More can be done in all arenas to ensure smooth flowing housing transactions, whether in the new build industry or beyond.
Will it ever end?
While some elements contributing to the cost-of-living crisis may be transient, others require sustained efforts to address fundamental issues like inflation and wage stagnation. Mortgage interest rates, in particular, will remain closely tied to the evolution of this crisis and the policy responses designed to combat it, making it crucial for brokers to stay informed and help their customers adapt to changing financial landscapes.
The value of mortgage advice from an expert adviser cannot be understated. In today’s market there are more options out there than customers realise, and we can cut through the noise to find customers a deal that’s right for them and their circumstances, ensuring that they can still achieve their homebuying goals in the midst of a challenging climate.
