Paying the price: Understanding affordability during uncertain times

The learning objectives for this article are to:

For both individuals and businesses, times have become tougher. The cost-of-living crisis, following hot on the heels of the Covid-19 pandemic has meant that consumers' wallets and bank balances that had already received a beating, have been hit ever harder in recent months. With the cost of energy, services and even the most basic of food items rising substantially, many people are becoming increasingly financially vulnerable.

Indeed, we face an economic context which has changed dramatically and is vastly different to that of just a year ago. This, combined with ongoing political uncertainty, has left many in precarious situations.

The mortgage market is a prime example of this. From December of last year interest rates have increased seven times. Having started at 0.1% in December the Bank of England’s base rate is now 3%, and some economists expect it to climb even further to 4% or 5% in the coming years. This places significant pressure on borrowers and will act as a further barrier for aspiring homeowners. While new reports suggest that rates may not rise as far as previously feared next year, which will be welcome news for those on longer term fixed products, many will still be concerned about the upcoming rate rises and what it will mean for their monthly repayments.

What do current market conditions mean for affordability?

Whether a customer is getting onto the ladder or managing their monthly repayments, they will likely have been affected by the recent economic volatility and political uncertainty and this will have had an impact on affordability.

First-time buyers

With mortgage rates increasing, getting onto the property ladder has become an even greater challenge for first-time buyers. While property price growth has started to slow, and even decrease in some areas, high mortgage rates is blocking many from taking the first step. This has been compounded by many mortgage lenders becoming more hesitant in their lending capabilities and subsequently reducing their products for first-time buyers. However, there are still options for first-time buyers and brokers are uniquely placed to be able to help those ready to get onto the ladder and become homeowners.

Current borrowers

For current homeowners, the big question is on remortgaging. With many two and five-year fixed products coming to an end, borrowers will be anxiously watching the Bank of England for news of further predicted rate rises. Indeed, approximately 1.8 million fixed term deals are scheduled to end in 2023. Brokers will be a key reassuring presence for borrowers concerned about how this current environment will affect them and how they can still access favourable rates and products.

Adverse credit

The ability to maintain a healthy financial history is becoming more and more of a challenge. With costs rising but wage inflation stagnant, the reliance on short term credit options like personal loans, credit cards, overdrafts, and buy now pay later (BNPL) schemes is growing. Over recent years debt has already been significant. Our research undertaken earlier this year found that the average person had £2,035 in unsecured debt, now with bills and general costs increasing, debt is likely to rise further. Our recent research found that 39% of people have taken on a form of unsecured debt due to the cost-of-living crisis. Taking on unsecured debt could be a red flag for some lenders and could mean that individuals are unable to get a preferable rate and therefore find it challenging to afford their new repayments. This is even more of a concern given the current rate environment.

Taking on more unsecured debt isn’t the only way that someone may be classed as adverse. Missing regular payments could also mean a person would fall into this category, and with bills rising there is growing potential for missed payments.

16% of people said they would be unable to afford their energy bill if it went up by just 1-10%. Looking at the extent of the challenge so far, over a tenth of people have missed some form of payment since the start of 2022, which rises to close to a third of 18-34 year olds.

This winter will be a test for many, with 14% saying they would consider missing their energy bill to cope with rising costs. Defaulting on bills can lead to a worsened financial history and can therefore impact affordability when it comes to either getting a mortgage or remortgaging.

Industry reaction and potential support

With a lot of uncertainty in both the political and economic spheres, many people will be confused and concerned about their housing situation, and what the future holds. With rates changing often, and lenders having to be agile, brokers can lend a supportive ear and provide guidance for borrowers on their next steps. There are still lending options available, even for those with complex circumstances.