The UK housing market is undoubtedly still in a state of flux. Rising interest rates make it more expensive to borrow money, the cost of living crisis puts pressure on budgets, and interest rates impact landlords, leading to soaring rents. Even a shortage of properties is playing a role. The housing market is notoriously difficult to predict as it's such a complex system, so there are no firm answers to when the market will find its Zen again. But this has reminded us that ultimately, if you have a mortgage, you are, at some degree, at the mercy of the banks.
According to the English Housing Survey, around a third of households have mortgages. One in four mortgage customers are on either a tracker or variable mortgage, both of which go up and down in line with the Bank of England. So, if the interest rate rises, payments are immediately adjusted in response. For the 6 million households on a fixed-rate mortgage, it's all about when your deal ends. There are an expected 80,000 of those deals ending this year alone.
The market is circular, and rates that go up at some point will go down, but when this will happen is anyone's best guess. What we see as a common theme is the prediction that house prices and mortgage rates will be challenging for the next four years or so. Lloyds Bank predicts house prices will drop and then remain stagnant for four years. And Peter Arnold, chief economist at the consultancy firm EY, agrees,"For the next three or four years, we'll see that pain being felt as it takes time for those higher rates to pass through."
Those in their 40s and 50s with mortgages will have seen interest rates this high before; however, this has been a shock for first-time buyers.
As Raza Ullah, CEO & Founder at Pfida, a startup challenging the existing mortgage approach, highlights, “mortgages can often lead to a great deal of uncertainty. As we've pointed out, no one quite knows what mortgage rates will do, and remortgaging every few years can be incredibly stressful without any crystal ball to help you see if the future will be affordable. And what if your financial position changes?”
Between interest rates, the market and now rising rents, we may be a nation of home buyers, but for many of us, the opportunity to buy a home seems further away than ever before. Affordability is now at its lowest point in around 150 years, but people still have a passion for homeownership, even if it feels out of reach.
The team at Pfida are one of the companies leading the charge on shaking up the market with their part-own, part-rent model with no mortgage involved. This means no loan, no interest and no direct impact by interest rates.
Pfida's model takes the mortgage out of the equation. Instead of buying a home with a mortgage, you buy your property in partnership with Pfida, signing a co-ownership agreement. There is no mortgage involved at all. You buy the percentage you can, and Pfida buys the rest.
In return for helping you buy your home, you pay rent on the share of the property purchased by Pfida. For example, if you bought 50% and Pfida bought 50%, and the rent on the property is a total of £500, you would pay £250 in rent every month to Pfida. Your rent is fixed for 12 months at a time and reviewed annually against the local property market and management fees, and they cap how much your rent can increase each year to avoid any shocks.
Also good to note is that rent could also decrease due to local property price movements when they come up for review. But if they go up or down, the cap is at a maximum of 5% to ensure payments remain affordable. This means using the same example if your rent was £250, it could only be increased by £12.50 per month. When we see rents going up by 40% this brings a lot of security to the process.
With no obligation, you can also increase the amount of the home you own over time. And this is encouraged. Remembering, the more equity you own, the less rent you will be paying overall, so with the Pfida model, it is to your benefit to purchase more when you can. To this, Pfida incentivises you to buy additional equity by offering rental discounts should you make equity payments above your rent monthly and selling you their share at the price they paid so that you can keep the upside.
As Raza Ullah highlights: "We've got customers who purchased with us before the interest rate increases. To give you a comparison, the rental rates we charged them at the time were around 3.5%, and those rates have barely moved despite the economic volatility. That's because we charge rent on a part-own, part-rent model. We review rents once a year and cap any increases, so you have absolute certainty and stability over your payments. What's more, our debt-free model means you can just pay rent when times are tough or purchase additional equity when you have spare capital, with zero fees."
The biggest thing people need to consider is that there may be restrictions on what they can buy and what they can do with it. Pfida is not a solution for anyone after a fixer-upper or auction property. You also might not have the same freedom to make changes to the property as any works need to be reviewed and approved by Pfida. Similarly, if owners want to sell, it needs to work for both parties as this model is based on being a genuine partnership.
However, if you're looking for a solution that doesn't leave you at the mercy of interest rates or even a bank at all, this is definitely worth looking at. The team are working hard to reduce the waiting list!