Halifax House Price Index: House prices fall in September as interest rates ramp up

Alice Haine, Personal Finance Analyst at Bestinvest, the DIY investment platform and coaching service, commented:

“With interest rates shooting up and inflation at a 40-year high, it’s no surprise to see the pandemic-fuelled momentum in the housing market finally cooling as buyers take stock of higher mortgage costs amid the continuing cost-of-living crisis.

“While house prices have proved resilient this year despite the wider economic uncertainty, they decreased slightly in September, falling 0.1% on the month, while the annual rate of growth slowed for the third month in a row, easing to 9.9% from 11.4% in August, according to the latest Halifax House Price Index, indicating that a market slowdown is now underway.

“Mortgage borrowing might have jumped in August, but the picture will be very different going forward in light of the chaos that has gripped the mortgage market over the past two weeks following Chancellor Kwasi Kwarteng’s ‘mini-budget’, which spooked the bond market and led to soaring interest rate expectations.

“With investors now expecting rate rises to peak at around 5.25% to 5.5% in 2023, the cost-of-living crisis is set to be overtaken by a cost of borrowing crisis, as homeowners looking to remortgage face huge jumps in their monthly payments and first-time buyers get priced out altogether.

“While the pace of mortgage rate rises has accelerated since the ‘mini-budget’, the situation is not a complete surprise. Mortgage costs have been increasing steadily since December when the Bank of England first started pushing up its base rate from a record low of 0.1% in a bid to curb runaway inflation.

“The base rate now sits at 2.25% with expectations it might jump up to 1% at the Monetary Policy Committee meeting next month, pushing up mortgage rates once again. This means a significant drop in house prices is now inevitable because the threat of higher mortgage payments will dent demand with buyers either pausing purchase plans to give the market time to settle or abandoning them altogether.

"The challenges ahead are already clear to see following two weeks of turmoil that saw banks and building societies pull masses of mortgage deals as they reassessed borrowing conditions. While the number of mortgage deals has increased this week, and stamp duty cuts, a short supply of homes and a robust labour market should support prices, this will deliver little comfort for borrowers because the offers now available are much more expensive.

“The average two-year fixed rate mortgage has now surpassed the 6%* mark – a level not seen for more than a decade - with a sizeable jump recorded in the two weeks since the Chancellor delivered his radical tax-cutting fiscal plan.

“Some of Kwarteng’s measures may have already been reversed, notably the move to scrap the 45 pence tax rate for higher earners, but mortgages rates are not expected to fall anytime soon – particularly as lenders are being flooded with applications from borrowers keen to beat any more rate hikes.

“With five-year fixes also now topping 6%, homeowners looking to remortgage face monthly payments hundreds of pounds higher when they lock in a new deal.

“However, remortgaging with a fixed rate, albeit much higher than a previous deal, is still a better option than moving onto a lender’s Standard Variable Rate – typically the most expensive way to borrow.

“Of course, mortgage rates may come down in the future, but that is unlikely to happen for some time, so it is still better to lock in a fresh deal now than have the household finances battered by more interest rate rises over the next few months.

“Deciding whether to go for a two-year or five-year deal is a difficult decision in this rapidly evolving situation. While fixing for longer may offer more security as it means payments won’t change for some time, the risk is that the BoE reduces interest rates well before the fix expires.

“A two-year fix, or perhaps three-year deal if their lender offers it, provides security for the near-term and the chance of lower rates further down the line, but making that call on your own can be nerve-wracking. The best option for those whose fixed rate deal is expiring in the next six to nine months is to use a mortgage broker who can offer a full analysis of the rates they can get for their mortgage size and home’s value over different fixed-rate periods.

“Time is of the essence at the moment as some deals are only available for a limited period, so any buyer wanting to push ahead with a purchase now should get their paperwork in place and be prepared to move fast to secure their chosen offer.

“First-time buyers should also be wary of overstretching themselves in this highly volatile market. With house prices now expected to fall as higher mortgage rates dent affordability, taking on a very high loan-to-value mortgage would not be a good move as they run the risk of ending up in negative equity where the house is worth less than their loan.”

* According to Moneyfacts