Our Head of Mortgage Services, Ben Horsfield, explores what inflation really means for homeowners
Most home owners will directly associate inflation with the increasing cost of the weekly shop and fuel costs inclusive of gas, electric and petrol.
Inflation however isn’t necessarily bad news for homeowners, however does the bad outweigh the good if you own your own home?
The Good News
The good news is that, like most commodities with an inherent value, property offers excellent protection against inflation due to the increase in value brought about by inflation. This can benefit you both during the term of your mortgage and also when you come to sell.
Home Values Appreciate
Since the turn of the century, the government has struggled to meet its annual house building targets. As long as this continues, demand will always outweigh supply. This factor, coupled with a weakening pound, means that current and prospective home owners will have to pay more for goods and services……. house prices increase.
Meanwhile, inflation also drives up the cost of building new homes, from materials to labour to land. This factor can seriously impact construction companies’ abilities to both raise funds and service those debts during the lifespan of each new development. This can limit the developer’s appetite to build more homes, reducing supply, boosting demand and further lifting home prices.
Homeowners end up with property worth far more than the price originally paid. This can enable further borrowing against the property for improvements or further investment in the market.
The Bad News
If you have had the foresight to fix your mortgage rate, then your payments will remain the same for a period of time. Those with variable rate mortgages will see their monthly payments increase, causing further discomfort during an uncertain period. However, inflation will directly impact your overall cost of ownership.
Your Council Tax will increase
Most local authorities will look to appraise the value of your property on an annual basis, and this could result in you moving into a new tax band, resulting in a higher annual council tax payment.
Your Home Could Become Underinsured
Historically, most insurance companies would provide you with an unlimited rebuild cost for your property. The rebuild cost is there to cover the cost of your house falling down and having to be rebuilt brick by brick. Over the years, the unlimited element has been scrapped by most provider with a fixed figure, limiting the insurers liability.
What I am finding, especially now given the double-digit inflationary price rises is that clients are potentially finding themselves under covered.
Maintenance & Repair Costs Go Up
There’s more to the cost of a home than the monthly mortgage payment, council tax, and insurance.
Maintenance can be key to homeowners maximising the enjoyment of their home, and the value should they come to sell.
It is essential to maintain key elements of your home. Essential elements can include the roofing, heating and electrics, pointing and windows etc. When inflation is high, labour and material costs rise which can negatively impact your ability to keep your home in an acceptable state of repair.
As the Bank of England battle with interest rates, a natural slowdown effect can occur in the property market. Raising interest rates can affect prospective homeowners’ confidence. As rates increase, home ownership becomes more expensive.
Lenders also become warier of the individual’s ability to successfully repay mortgages and have recently reduced some of the income/affordability multiples. This has meant higher interest rates for some, and lower total loan amounts for others.
Higher interest rates can also push the economy into recession, another risk factor for housing prices. This is a subject that I will cover in the coming months.
Summary – Inflation Good or Bad for Homeowners?
High inflation tends to help homeowners more than hinder them long-term. It will increase the value of their home and should outweigh the overall cost of ownership. House prices rarely drop, even when the Bank of England raises interest rates.
However, inflation can lead to some homeowners feeling as though they have no alternative other than to either remortgage or sell their home. If you are struggling with the cost of maintaining your home, selling will negatively impact your overall position. Inflation will mean the house you are moving to has also proportionately increased in value.
Moving home can cost a substantial amount when you bake in lender fees, valuation, estate agents and legal fees, so it is important to factor all of this in before making a decision.
What I expect to see if the Bank of England are unable to bring inflation under control will be more properties coming to the market where the current occupiers are choosing to downsize to a property to lower their overall cost of living.
This will leave the individuals downsizing with a less valuable home but an enhanced ability to comfortably afford the upkeep.
I hope that you have found the article insightful around inflation and the impact that it can have as a homeowner.
If you wish to receive any advice around your mortgage, or your personal circumstances, then please call Ben Horsfield on 0161 969 1703.
Ben Horsfield CeMAP
Head of Mortgage Services
Suttons Independent Financial Advisers