SEPTEMBER 2023

On 3 August 2023, The Bank of England’s Monetary Policy Committee raised interest rates for the 14th meeting in a row. Rates were increased by 0.25 % to 5.25%, the highest they have been since April 2008.  The results for the next MPC meeting will be published on 21st September.

INFLATION FORECAST

The Bank is increasing interest rates in response to high inflation, which stood at 6.8% in July this year, down from its peak of 11.1% in October 2022., but still well above the MPC’s target of 2%. The MPC also published new forecasts for the economy where it expects inflation to fall to around 5% by the end of this year/ beginning of 2024, before falling to a forecast 3% over the next few years.

WHEN WILL BASE RATE PEAK?

Market expectations as to when base rate will peak move constantly, changing with every new release of economic data, with inflation, wage growth, and unemployment all contributing to the latest assumptions.

When interest rates are high, debt, especially mortgages and loans become much more expensive although banks will offer better rates on savings accounts. In return this translates into less demand for goods and services so that prices will reduce too, with the end result of lowered inflation being achieved.

INCREASED MORTGAGE TERMS

Most lenders have now introduced terms of up to 40 years to reduce the monthly cost of servicing a mortgage. This was traditionally 25 years but has increased over the years as homes have become more expensive to purchase. By lengthening the term, a borrower spreads their payments over a longer period so reducing the monthly cost. Unfortunately, this also means that the overall cost of the mortgage will increase because the borrower has to continue to pay interest on the loan for longer.

PROPERTY PRICES FALLING

Property prices in Jersey peaked at an abnormally high level in August last year, although it is clear that asking prices are now falling and there is evidence that the market might be slowly picking up again, as vendors lower their prices in an attempt to match the maximum that borrowers can obtain from mortgage providers.

The approximate 20% reduction in asking prices does not seem to have been enough however, and it is generally felt that prices will have to reduce by a further 15% for the market to return to a certain amount of reality.

EMPLOYING A MORTGAGE BROKER

The job of a mortgage broker is to find the lowest possible rate of interest from all of the Island’s mortgage providers -there is no point in looking off Island as the UK banks and Building Societies work in a totally different jurisdiction and are unable to lend into the Crown Dependencies, so making the choice much more restricted.

The anomaly that has now risen is that local providers, working to a rigid affordability criterion which is designed to reduce the risk of a borrower defaulting on their payments, may not now be able to offer the highest level of borrowing at the most competitive rate of interest in the market. With the dramatic surge in interest rates, it is now more likely that a borrower will be able to maximise their borrowing but at an interest rate that is no longer competitive.

INCOME MULTIPLES

Income multiples of 6 times gross income, sometimes more, are now becoming history which is the reason why the local housing market will have to adjust downwards.

A classic example of the problems that we face is illustrated by the experience of a young couple who came to The Mortgage Shop seeking advice before looking at the market.

With a 10% deposit, a 40 year mortgage term available, a gross income of £105,000 pa and no children, debt or other liabilities whatsoever, a year ago we would have been easily able to obtain a mortgage of £630,000 plus, so accessing a purchase in the region of £700,000.

A search of the whole of the market in August this year produced mortgage options ranging between £450,000 and £517,000, so reducing the maximum purchase price to between £500,000 and £574,000 – a huge drop in purchasing power.

Interest rates are not going to return to the record lows that we have seen in recent years, which means that the only way the local housing market can become active again, is for prices to fall.

NUMBER OF PROPERTIES ON THE MARKET

On a more positive note, a look at the pages of places.je shows that there are 1562 properties currently on the market, of which 437 are in the First Time Buyer range up to £500,000 and 476 in the range from £400,000 up to £700,000.

These figures clearly show a potentially active market for the future, with great news for First Time Buyers in respect of choice and reducing asking prices.

LATEST INTEREST RATES

Mortgage interest rates continue to climb slowly, rising in anticipation of a further Base Rate rise, then falling moderately once the latest announcement has been made by the Bank of England.

A comparison between the lowest rates available in January this year and those available at the time of going to press, shows that it is still wise to fix for five years, although before making the final decision, it is best to seek advice from your mortgage broker or lender.

Bank of England Base Rate 5.25%

2 year Tracker rate 60% LTV: 5.95% - (January 5.95%)

2 year Fixed rate 60% LTV: 6.49% - (January 5.79%)

2 year Fixed rate 90% LTV: 6.69% - (January 6.69%)

5 year Fixed rate 60% LTV: 6.00% - (January 5.99%)

5 year Fixed rate 90% LTV: - 6.29% - (January 5.49%)