The year 2020 was one that many people would rather forget. The coronavirus pandemic wreaked havoc on our day-to-day lives, affecting our health, happiness, and finances.
One sector that experienced its fair share of ups and downs was the housing market. In spring’s lockdown, the housing market pretty much ground to a halt when social distancing measures put a stop to house viewings.
By November, the number of buyers registered on estate agents’ books reached their highest level for 16 years as people rushed to take advantage of the Stamp Duty holiday, according to NAEA Propertymark data.
With a new year upon us, you’re probably wondering what 2021 has in store. Read on to discover three things that could affect your mortgage this year.
1. Negative interest rates
There is increasing speculation that 2021 could see negative interest rates being introduced in the UK.
In October, the Bank of England wrote to the UK’s banks asking them how ready they would be if the base rate, which currently sits at a 300-year low of 0.1%, moved into negative territory. The aim of negative interest rates is to encourage banks to lend to businesses and consumers, thereby stimulating the economy.
In theory, negative interest rates would result in your lender paying you for having a mortgage with them. In Denmark, where mortgages with negative interest rates went on sale in 2019, some borrowers were lent money at a rate of -0.5%. This meant the sum they owed their lender fell each month by more than the sum they had repaid.
It’s unlikely that this would be the case in the UK. First off, lenders are often slow to pass on interest rate cuts and, in any case, most borrowers have fixed-rate deals that usually fix their rate for two or five years. Even trackers, which are linked to the base rate, are set at a certain percentage above the base rate and sometimes have a floor which they won’t drop below.
It’s also worth noting that the base rate is just one factor that lenders take into account when setting mortgage rates. They also look at the housing market and the wider economy.
So, while you might be able to switch to a more attractive mortgage deal, it probably won’t be a case of getting free money from your lender.
2. The end of the Stamp Duty holiday
Despite the pandemic causing extensive damage to the UK economy, the housing market was buoyant in 2020.
Between July and October, the number of properties progressing through the sales pipeline increased by 50% year-on-year, according to Zoopla research. Analysis by Halifax suggests average house prices have risen by more than 7% over the past year.
Although some of this was driven by pent-up demand from spring’s lockdown, the Stamp Duty holiday also led to a flurry of buyers. In Scotland, the zero-tax LBTT threshold was increased to £250,000, while in England and Wales, Stamp Duty was cut to 0% on all properties worth £500,000 or less.
The Stamp Duty holiday is due to end on 31 March 2021, which could result in the growth in sales and house prices starting to slow. The Centre for Economics and Business Research (CEBR) has predicted that house prices could fall by almost 14% in 2021 once the cut in Stamp Duty ends and the economic impact of coronavirus filters through to the property market.
If the housing market weakens and concerns about the economy and unemployment increase, we could see lenders tightening their lending criteria. Mortgage rates might increase and more lenders could pull their high loan-to-value (LTV) products.
The latest data from Moneyfacts shows the number of high LTV mortgages has already plummeted. At the end of November, the number of 90% LTV deals stood at 81 – down from 779 at the beginning of March. If you have a small deposit, it could prove more difficult to secure a mortgage.
3. A potential fall in house prices
No one really knows what will happen to house prices in 2021. Some commentators have warned they could fall, while others think they will continue to rise.
Negative predictions include CEBR’s warning of a 14% fall and Halifax’s forecast of a drop of between 2% and 5%. Halifax’s prediction would only partially reverse the 7.6% increase in average prices seen over the past year, but it’s a worrying time for anyone who has recently bought a house. There’s a risk you could go into negative equity.
The term negative equity means your property is worth less than the mortgage secured on it. If you try to sell your home when it’s in negative equity, you could owe more money to your lender than your property is worth. And if your mortgage deal is coming to an end, your lender might refuse to offer you a new deal, moving you onto their more expensive Standard Variable Rate instead.
Negative equity is less of an issue if you’re planning to live in your home for a long time and have several years left on your mortgage deal. Contact your mortgage broker if you have any concerns.
It’s worth bearing in mind that property market forecasts are especially unpredictable at the moment because of the uncertain economic and political backdrop. In fact, Zoopla reckons house prices could rise by 1% in 2021, with housing markets in Wales and Scotland expected to be the top performers.
Get in touch
If you’d like advice on how 2021 could affect your mortgage, please get in touch. We’ll make sure you have the mortgage deal that’s right for you and explain all your options. Email [email protected] or call 0131 339 2281.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.