What To Expect with Mortgages in 2023
Evaluating the property market and the wider economy is a daunting task now as the government seems to be frequently moving the goalposts. If you are looking at mortgages in 2023 you may feel overwhelmed by the market changes and options available to you.
This guide examines the mortgage and property market and helps you get to grips with the mortgages in 2023 available to you
Let’s explore this complex topic further
What Will Drive Mortgage Rates in 2023?
A key driver for mortgage rates in 2023 will be the government’s newly announced inflation target. Currently the inflation rate sits at around 10% and Rishi Sunak has committed to halving this rate by December 2023.
There are two ways to halve an inflation rate; print less money (through quantitative easing) or increase the Bank of England base rate. For reasons too complicated to explain here, printing less money is not really an option with the economy sitting as it is, leaving base rate increases as the only route the government can take.
When the Bank of England increases its base rate, lenders have an increased cost of borrowing. Banks and building societies pass on this higher cost to borrowers through mortgage rates.
Property Values in 2023
Historically, property prices have typically tapered off or fallen at times when the Bank of England increased the base rate.
This is because mortgages become more expensive and there is less demand. The reduced demand will normally result in property prices falling.
It is important for you to factor this in when making an offer on a property as you do not want to buy a property only for it to quickly decrease in value. A falling property value can cause you to be in negative equity (when your mortgage balance exceeds your property’s value) and you may need to put a further deposit down to remortgage when your deal ends.
Is Now a Good Time to Fix a Mortgage?
The three most popular types of interest rate that mortgage lenders operate are:
- Fixed Rates – the interest rate is fixed for a specific product term.
- Tracker Rates – the interest rate tracks the Bank of England base rate,
rising and falling with the base rate.
- Standard Variable Rates (SVR) – If you are not tied into a mortgage
deal, lenders operate SVR as a default interest rate. SVRs tend to be much
higher than fixed and tracker rates and they are set independently by the
Fixed rate products offer a greater level of security in tumultuous markets as you will know exactly how much your monthly mortgage payment will be each month.
Currently, most tracker rate mortgages are cheaper than fixed rate mortgage deals, however when you consider that the base rate could increase further to combat inflation, it could be the case that tracker rate mortgages become more expensive over the term of a mortgage deal.
Although, a significant benefit of Tracker rate products is that they may not have any early repayment charges (aside from a small exit fee). This means that if Tracker products become more expensive than Fixed products, you should be able to explore switching to the Fixed.
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Will it Become Harder to Be Accepted for a Mortgage?
Overall, mortgage acceptance criteria is not expected to change in 2023. You will still need to pass the lender’s criteria and credit checks.
You will also need to provide a deposit against your mortgage. However, if you have a low deposit for a purchase, such as 5% of the purchase price, you may experience more difficulty in acquiring a mortgage than you did in previous years. This is because there is a risk of deflation in the housing market due to the reduced demand from buyers, meaning that there is a greater risk of negative equity in the current market.
Buy to Let Mortgage Criteria
Due to recent market changes, you may find that a lender applies stricter criteria to their Buy to Let mortgage products.
When you obtain a Buy to Let mortgage, a lender will assess how much rental income you can expect to generate and compare it to your monthly mortgage payment.
The expected rental income will need to be higher than your monthly mortgage payment. Lenders conduct a rental stress test to check this.
In some cases, you may find a lender declines a Buy to Let mortgage application on the basis that the expected rental income is not sufficient. To mitigate this, you may be asked to put a greater deposit down on the property. For Buy to Let purchases, the minimum deposit requirement is typically 20%. So, if this deposit was insufficient for the lender, based on the rental stress test, you may need to deposit 25%, 30% or more to acquire the mortgage.
A higher deposit reduces the total amount you need to borrow and reduces the monthly mortgage payment. This may enable the difference in expected rental income to meet the lender’s threshold on the stress test.
Advice for First Time Buyers
If you are a first-time buyer, the government has a few advantageous schemes and benefits available.
The biggest benefit currently is the stamp duty exemption for most first-time buyers. The stamp duty threshold for first-time buyers is £425,000 for properties under £625,000.
This high stamp duty threshold means most first-time buyers will have no (or little) tax liability. A mortgage broker will be able to outline government schemes and assist you with your mortgage.
Using the Mortgage Guarantee Scheme
The government has extended the Mortgage Guarantee Scheme until December 2023, which will also help first-time buyers get a foothold on the property ladder.
What Our Clients Have To Say
Advice for Homeowners
If you are an existing homeowner looking to remortgage or move, the market is a little more daunting.
If you are remortgaging, you may find the difference in interest rate available now compared to your previous interest rate to be high.
Remortgaging onto a new deal is nearly always preferable though as the alternative is a lender’s standard variable rate which will likely be much higher than a remortgage deal.
If you are looking to move property, there is some good news as stamp duty rates are favourable compared to before the pandemic.
You will find the same challenges with your mortgage and interest rates as outlined in this article. If you are moving from an urban area to a rural area, you may find your desired property is cheaper than expected. This is because property prices are expected to fall more in rural areas than urban areas.
Speak to a Mortgage Adviser
It is safe to say the mortgage market and wider economy present challenges for many homeowners and property buyers in 2023.
Some of these challenges can be reduced by speaking to a mortgage broker who will provide advice specific to your circumstances.