House price inflation remains strong, but Brits should avoid committing themselves to a mortgage that they won't be able to repay if interest rates go up.
The latest Nationwide House Price Index shows that average UK house prices rose to £174,566 in November, 6.5% higher than the same month in 2012.
While prices remain around 6% lower than their peak level in 2007, the current level of inflation is the strongest recorded since July 2010, after being relatively flat for the first half of the year.
The rise in inflation has been attributed to the rise in demand for housing as mortgages have become cheaper and more readily available.
The number of approvals for house purchases reached 66,735 in September – a 34% increase on the same month last year.
Nationwide’s chief economist Robert Gardner said that improvements to the labour market and the economy had boosted confidence among buyers, while policy measures aimed at improving the cost and availability of mortgages were also “playing an important role”.
The fall in the average cost of a 90% loan-to-value mortgage, from 5.64% in October 2012 to just 4.42% in October 2013, has prompted a reduction in typical monthly payments of £110 at the current average house price, he added.
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Beware Interest Rate Rises
But the Bank of England Governor Mark Carney has warned aspiring homeowners that they need to be able to pay their mortgages when interest rates go up and not rely on future intervention to help them out.
Some on short-term fixed-rate deals will encounter a leap in their rate following the expiry of the offer period. Those who take out the new Post Office 90% mortgage at 3.58% will revert to a subsequent rate of 4.49% unless they secure a new deal.
Those with variable rate or tracker mortgages remain vulnerable to any change in the Bank of England base rate, though they may have more flexibility to overpay their mortgage at the lower rate.
(For more details, check out our guide: fixed-rate vs. variable rate mortgages.)
The Governor’s warning follows the Bank’s announcement that the Funding for Lending scheme would no longer be supporting the residential mortgage market from January 2014.
He has advised future homeowners to think carefully about the debts they were taking on with a new mortgage, and not to expect any assistance in the event that interest rates head upwards in the forthcoming years.
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