Homeowners Losing The Inflation Battle

There is a chance that property prices, especially residential properties, will not be able to rise this year due to the high inflation rates of other necessities such as fuel and food. This, coupled with stricter policies of lenders, who have been spooked by the sub prime crisis, will make it even more difficult for people to get new loans for their dream house.

Even though the Bank of England has cut interest rates, it is doubtful whether property rates will show any sharp increase or even any increase at all. The average increase in the house rates in the UK had been 4.5% in the previous year even though it had touched 5.2% in December, as indicated by ‘Halifax’. The current year too is expected to remain stagnant. With repossessions at an eight-year high, the homeowner is now squeezed from all sides, and with no immediate solution in sight, the homeowner now resembles a deer caught in the headlights of 3 or 4 cars at one time. Lenders though, are trying to show more flexibility before going in for repossessions, since properties going into auctions fetch them even lower rates. Consequently, lenders are resorting to innovative ways to ensure that the homeowner remains in a position to repay the loan by fixing penalties only on the defaulted installments or adding that interest on to the balance loan amount. With the Council of Mortgage Lenders stating that around 1,40,000 people defaulting on their mortgage payments by 3 months, it will only need the economy to recede into a recession, before lenders panic and start repossessing their properties on a large scale. All the above factors are like an avalanche of financial disasters just waiting to happen and the unfortunate part is that there are many factors, which could trigger it off.

A 0.25% interest rate cut was announced by the Bank of England recently but with some lenders showing lethargy in passing the full benefit to homeowners citing various reasons, homeowners have no choice but to keep on shelling out money on all fronts. There were, however, others who passed on the entire benefit to homeowners, but it could be of little solace to homeowners already facing another sharp rise in their energy bills. Hence, one form of inflation snatches away the other form of relief. Food prices too have increased drastically not only in the UK but also in overheated countries such as China. Homeowners, whose fixed rate loans are about to expire, too will find themselves with the torturous thought of finding new loans to turn to. So, even though property rates have remained almost stagnant, banks and other lenders have managed to jack up lending rates by increasing the arrangement fees and lowering the total percentage of the loan as against the total value of the property, all in a bid to safeguard themselves against any defaults in payments. Homeowners can try the overpaying route to try and get out of this situation. So if your home loan is for 15 years, you can try and get it reduced to 10 years. This might increase your monthly installment but will reduce the interest on that loan and also reduce the time taken to square off that loan. However, this can be possible only if you have some reserve money in hand and also expect that money to keep on coming in the future years. For others, it might mean selling off their big house and moving to a smaller one to reduce their liabilities so that they can at least have a roof over their heads.

In short, only homeowners that take fast and decisive action will be able to come out of this crises with some minor bruises, but those who just sit around due to panic or indecision might be the first to see their homes being repossessed.

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Article written by: Craig Parker - Make Money Expert