Looking ahead for 2022 – Fluent Money

The perfect storm of tax savings and changing buyer priorities meant prices rose by as much as 10 per cent, but now this has ended, 2022 will see much slower prices rises.  

A lack of supply means fewer homes will be sold and so we will see a big drop in the number of transactions going through. The stamp duty cut and the end of Covid-19 lockdown meant many people moved sooner than they otherwise would have done in 2021, resulting in transactions peaking at nearly 200,000 in June which is double the figure we would see in a normal year.  

Inflation will be a big theme in 2022, having risen to 5.4 per cent in the 12 months to December, the highest in 30 years. This led to the Bank of England making a decision to increase the base rate to 0.25 per cent and later 0.5 per cent to temper inflation potentially rising further to seven per cent this year.  

The good news is that the starting point for rate rises is incredibly low, with mortgages having become very cheap in the second half of 2021. So, while it’s highly unlikely we’ll see the battle to offer sub-one per cent mortgages repeated in 2022, don’t expect rates to soar either.  

Relaxed affordability 

One of the biggest challenges facing first-time buyers is that they can’t borrow enough to keep pace with rising house prices and current affordability tests can lock those with lower incomes out of homeownership.  

However, the Bank of England could be set to relax one of its key lending rules in 2022 as it’s going to consult on removing the rule which requires lenders to ensure borrowers could afford a three per cent rise in their mortgage rate before they approve their application.

The change could be the difference between being accepted or rejected for a mortgage for some applicants and could help many more take out bigger loans. 

Mortgage terms will get even longer with rising house prices resulting in first-time buyers needing to take on longer mortgages for affordability. While 25-year mortgage terms were once standard, we’re now seeing 35-year and even 40-year mortgages becoming more common. 

The impact of interest rates on the market 

Interest rates can drive property prices as when rates go up, the cost of debt rises. When the cost of debt is high, it discourages people from borrowing and slows consumer demand.  

Higher interest rates make borrowing more expensive. For households, that could mean higher mortgage costs, although – for the vast majority of homeowners – the impact is not immediate, and some will escape it entirely. 

Even before the decision by the Bank of England’s rate-setting Monetary Policy Committee, there were signs that the era of ultra-low mortgage rates was at an end as some lenders have already started to raise rates for those applying for a new home loan.  

Brokers are expecting any rises in mortgage rates to be “slow and measured”, which would mean mortgages would stay cheap by historical standards for some time.  

The lower interest rates are, the lower the cost of borrowing to pay for a house is, and the more people are able to afford to borrow to buy a house.