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Inflation, interest rates and falling house prices – what you need to consider

House prices might be teetering on the brink, here we look at what this could mean for mortgages and retirement planning.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Sarah Coles
Senior Consumer and Personal Finance Analyst

Published on 26 June 2023

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

House prices might be teetering on the brink. If we get price falls in the coming months, it would be horrible news for sellers, but the misery wouldn’t stop there. The impact of price drops would ripple across the finances of millions of homeowners.

Figures out this week revealed that back in April, annual price rises slowed to 3.5%, and while they rose during the month, there were already plenty of warning signs. Demand was down, and sales were down too. The drop in mortgage approvals for new sales didn’t look great for the months ahead either.

Mortgage market movements in the weeks since are likely to have tipped us over the edge into a tougher period for property. Core inflation (which excludes energy, food, alcohol and tobacco) hit its highest level in over 30 years and wages grew faster than any other time (outside the pandemic period).

When both were announced, it fuelled rapid rises in interest rate expectations – inflating fixed mortgage rates, the average two-year fixed rate pushed through 6%.

This is going to encourage plenty of buyers to reconsider their position, and could force some remortgagers to sell up before their repayments become unaffordable.

A combination of lower demand and more supply would dampen prices, and we could even see annual falls by the time the summer is over. This would hit homeowners hard – even if they have no intention of buying or selling in the near future.

What are the risks if you fall into negative equity?

Falling house prices would raise the risk of negative equity, especially for those who bought while prices were high and had very small deposits.

This doesn’t have to be an issue for anyone who plans to remain in the property for years to come, when prices might have chance to recover. However, if you need to move on or remortgage while you still owe more than the home is worth, it can cause real headaches.

It can still create problems even if you escape negative equity. That’s because people who are worried about the threat will often prioritise paying down the mortgage as quickly as possible, which could affect other areas of their finances.

A pause in anything from building emergency savings to making pension contributions can create problems for the future.

How could falling house prices impact retirement?

For those who have factored property into their retirement plans, there’s a potential headache too.

If you have an investment property you intend to sell, or a large home you want to downsize, any fall in house prices could seriously upset your plans. You might have assumed steady property price growth between now and retirement, and a period of price drops could throw a spanner in the works.

At the same time, rising inflation will have increased your retirement savings target, because the cost of living in retirement is rising too. This means there’s even more risk of a shortfall.

If you were planning to sell a property to supplement your pension, it’s worth revisiting your plans. To close the gap, it’s best to work out the impact of the potential changes, and assess whether you need to boost your retirement savings.

What this means for withdrawing equity

If you’ve been regularly remortgaging in order to withdraw some of the equity from your home, you could face the prospect of this source of cash drying up just as your income needs to stretch further. If you’re in this position, it’s essential to revisit your budget to see if there’s any way you can cut your costs before you run out of road.

This is going to be an unsettling time for a lot of people, but it’s important not to panic if prices drop. Property price falls – even really significant house price crashes – don’t last forever. It’s just worth taking steps to make sure the impact of those price falls don’t affect you long after house prices themselves have recovered.

This article isn’t personal advice. If you’re not sure what’s right for you, ask for financial advice.

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