THE plummeting pound and soaring interest rates could create a mortgage ticking time bomb crisis.

The value of the pound against the dollar collapsed to $1.03 yesterday, causing the Bank of England to say that it "won't hesitate to change interest rates".

Experts predict that interest rates could peak to 6% next year – and concerns have been sparked about how the chaos will hit homeowners.

When interest rates go up, so does the cost of borrowing, including  loans, credit cards and mortgage repayments.

Budding buyers may put their dreams of buying, or moving up the ladder, on hold because of unaffordable rates.

It means borrowers are rushing to lock in fixed deals as early as possible to avoid future rate hikes.

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But major lenders have already pulled their fixed deals for new customers.

It's sparked concerns among experts that house prices could fall as buying a house becomes unaffordable for many.

We explain what could happen to house prices – and what it means for your money.

What could happen to house prices?

There is lots of data on what house price estimates currently stand at.

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Latest data from the Land Registry shows that the average house price as of July 2022 stood at £292,118 – a rise of 2% compared to the previous month, and 15.5% up compared to last year.

Halifax said the average house price in August stood at £294,260 – just 0.4% higher than the month before.

While Rightmove said the average price of a property new to the market went up by £2,587 month-on-month in September, and now stands at £367,760.

It added that if interest rates continue to soar, first time buyers could see their average mortgage repayment jump from £1,057 to £1,114 a month.

With other household bills from energy to food rising, it could cause people to put their plans to buy on ice – even with the cut to stamp duty, which could save buyers thousands on their purchases.

That means, as demand slows, we could see house prices cool, or even drop.

The Bank of England has already ordered banks to outline how they would cope if house prices fall by a third.

It doesn't mean that prices will drop by this much – but lenders are being told to show whether their balance sheets are robust enough or not.

But if interest rates do spike to 6% by next year, house prices will "naturally come down", Quilter mortgage expert Karen Noye said.

"However, we are still suffering a severe lack of stock in the market and an ever increasing population of renters wanting to buy so house prices may not see a severe crash but a downturn is very likely in the short term," she added.

Many experts say it's more likely that we will see a reduction in house price growth, rather than a drop.

What does it mean for your finances?

Here's what you should do if you're a homeowner.

What it means for homeowners

While the majority of mortgage holders are on fixed-rate deals, 1.8million fixed deals are scheduled to end next year – meaning some homeowners could be in for a bill shock when they do eventually come to take out a new mortgage.

Someone who took out a £200,000 two-year fixed mortgage in March 2021, when the average rate was 1.5 per cent, would see their annual bill leap by £7,000 if rates rise to 6 per cent, according to figures from investment firm AJ Bell.

There are now fewer fixed mortgages to choose from, and rates will rise.

As the cost of living soars, it means some may experience a drop in affordability, making it harder to get top rates.

It means millions of households could be hit by a mortgage ticking timebomb next year when deals end.

If you're wondering whether to fix early now ahead of expected rate hikes, then you'll need to figure out whether it is worth doing so if you have to pay an early repayment charge.

Lenders slap this charge on borrowers if they leave their deal early – it can be up to 5% of your remaining balance, which could be thousands of pounds.

Use a calculator like one offered by Nous, the cost of living website, which helps you work out if it’s cost-effective to refix early.

In any case, you should seek professional advice from a mortgage broker.

What should first-time buyers do?

You'll need to look carefully at your budget to see if you can definitely afford taking on a mortgage now.

Major lenders have already started to pull fixed mortgage deals for new customers, including including Halifax, Virgin Money and Skipton Building Society.

It means that there will be less deals on the market to choose from – and less chance for you to shop around for the best one.

However, a drop in house prices as demand cools could spark good news for first time buyers, John Charcol mortgage technical manager Nick Mendes said.

"It will be welcome news to first time buyers who for the last year have seen property prices increase month on month for the past 2 years," he said.

"But with property prices increases over the last year and wages not keeping up with inflation and rates rises, many first time buyers could be holding back on any plans and wait to see how things settle before jumping into one of the largest commitments in a mortgage."

Rose Capital mortgage adviser Richard Campo said first-time buyers should seek professional advice about their options.

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"A good mortgage broker will outline all your options, so you can make an informed decision on what is best for you.

"In an environment where rates are being pulled daily, you need an expert in your corner that is working for you.” 

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