The UK housing market is in a period of growth. The reason the many house price indices are indicating strong demand is being credited to increased incomes and lower interest rates from lenders on mortgage offers. There has also been an increase of supply in available homes on the market, including starter homes for first-time buyers. Increased house prices reveal a healthy economy, but there is concern that house prices are already elevated from the buying boost caused by the pandemic when there were historically low interest rates. If house prices are on the rise, then what is ahead for home buyers and what will it mean for homeowners? We want a healthy and robust housing market, but rapid growth could be bad.

The house price index that is considered the most reliable is the one released by the Land Registry. It includes actual property sales, including cash sales, and not asking prices, or simply one lender’s approved mortgages. The most recent Land Registry’s UK House Price Index is the one released on July 2024 data. The house price grew annually by 2.02% and rose to £290,000 in July.

The data also revealed the gap that exists between homes purchased by first time buyers and home movers in Great Britain. The average home mover house price is £336,000 and the average house price for a starter home was reported as £243,000, marking a £93,000 difference, which for many is concerning and shows how expensive it is for a first-time buyer to climb onto the property ladder.

The house price growth could quickly shut many hopeful home buyers out of the market. The first to feel excluded would likely be first-time home buyers. Saving for a deposit over the last few years when inflation was taking more money out of people’s budgets has been difficult. It was mentioned in one study that it would take more than ten years to save for a deposit at today’s house prices. 

Without buyers for starter homes, fewer homeowners will have buyers that will enable them to move home. It is true that there are buyers in the market that will purchase starter homes such as landlords adding to their rental portfolios, and even investors intent on upgrading and improving homes to sell later on for profit, but it does not dismiss the important presence of first-time buyers in the UK housing market.

Homeowners do not only benefit from the housing market when they are intent to sell their home to upgrade, or even to downgrade such as seniors might do when they are empty nesters. When house prices are on the rise, so likely are property values. Not all areas will grow in value the same, but where buyers are looking and buying there is normally an increase in property values.

The increase in property values helps a homeowner when they go to remortgage. Lenders use the value of the home just as they did when it was purchased to determine whether or not to loan for a new deal. Lenders are not in the habit of loaning out more money for a property than what it is worth, so they use the loan to value ratio or LTV to determine whether lending to the borrower is a good decision for them, and they also use it to determine what interest rates and deals to offer the borrower. The lower the risk in lending, the more likely the borrower will be offered the better interest rate deal.

When a buyer negotiates the price of the property, the lender will determine their own value and not necessarily the asking price or agreed upon price. The lender will then expect in most cases a deposit of at least 5%, but usually 10%. For simplification, lets assume a buyer is wanting to buy a home where the asking price is indeed the exact value of the property and they are offering a 10% deposit. The LTV would then be at 90% for the borrower and they would shop 90% LTV deals.

As a homeowner pays down more debt, their LTV will lower. Perhaps they will seek a remortgage at the end of their current mortgage term having paid down 5% more of the debt and this time they are seeking only an 85% LTV. Less risk in lending will likely bring the borrower better interest rate offers. 

There is also the possibility that the property has gained value. This could be due to investments in the property to upgrade it or improve it, and it could also be due to an increase of demand in the housing market for that type of property in the particular area it is located. The increase could at times be substantial and could for instance take a homeowner’s LTV to a lower level that would bring even better interest rates. 

This is why it is important for a homeowner to care for their property and make sure the value is sustained and even possibly increased. Of course, it is also why it is important to pay one’s repayments and consider, when possible, to pay more than required to take the debt down faster. It will pay off with greater interest rate savings when the homeowner is in need of a remortgage which occurs when their current term ends. 

House prices rising can help a homeowner, but when it closes out buyers or ceases to become a smart investment for landlords and other types of property investors, the market can suffer, and it can harm homeowners. This was the fear last year when experts were concerned property values would drop and homeowners would find themselves in negative equity with their debt being greater than the value of their home. In negative equity a homeowner would be out of a reach of a remortgage and would become a prisoner to their lender’s standard variable rate or SVR, which could be double or more the interest rate level found with a remortgage.

It is good news for homeowners that the threat of negative equity has quieted. It is good that the housing market is showing strength and growth, but home buyers need to be able to stay in the market and become homeowners. It is hoped that as house prices grow, lenders will continue to motivate purchases with lower interest rates. In doing so, homeowners will find their own path to lower interest rates through better LTV ratios and also by taking advantage of the lower interest rate remortgages offered by lenders as rates are reduced.