Experts issued a warning on Monday that rising mortgage costs are affecting deal renewals and the reduction in the number of products available, placing UK borrowers at risk of economic harm.
The average two-year fixed rate mortgage on a residential property in Britain increased from 5.98 percent on Friday to 6.01 percent, the highest level since December 1, according to Moneyfacts, a financial information company.
The mini-budget that rattled the market at the end of 2022 was the catalyst for the spike. Moneyfacts stated that the last time two-year fixed rates were above 6% was in November 2008.
From 5,264 on May 1 to 4,683 today, the number of residential mortgage products available has also decreased.
According to Martin Stewart, director of mortgage advisory London Money, the mortgage and housing industries had experienced a “seismic” nine months, “on a par with the financial crisis,” albeit with distinct causes.
The market appears to be broken and dysfunctional. According to Stewart, who spoke with CNBC, “We have seen evidence where advisers are in queues with 2,000 others trying to secure something that might not actually exist by the time they get to the front of the queue.”
“Pretty much everything starts with a 5 now,” as opposed to “1 or lower” as it did two years ago.
Moneyfacts says that the average rate for a mortgage with a term of five years is currently 5.67 percent.
Prime Minister Rishi Sunak told ITV’s Good Morning Britain on Monday that the government’s priority was halving inflation and that it needed to “stick to the plan” when asked about assistance for struggling households.
In recent weeks, market uncertainty has caused banks like HSBC and Santander to temporarily discontinue mortgage products.
Short-term yields on UK government bonds are also rising, with the 2-year yield reaching a new 15-year high on Monday.
From the current 4.5 percent, markets are pricing in a peak interest rate of almost 6 percent. U.K. inflation, meanwhile, remains among the highest of all developed economies at 8.7%, with central bank officials warning that second-round effects, including price setting and higher wages, could keep it higher for longer. A strong labor market report on June 13 sent rate expectations higher, with the Bank of England set to announce its latest interest rate decision on Thursday after enacting its 12th consecutive hike in May.
Senior strategist Viraj Patel of Vanda Research stated, “I think the worst of the mortgage crunch is ahead of us.” He said that more than half of households still need to remortgage at higher rates, which will make the economy and housing market more stressful.
Patel stated that he anticipated that the “bulk of the consumer slowdown coming from higher mortgage costs” would arrive in the home in the second half of 2023.
According to what he stated to CNBC, “the BoE and markets need to be aware of the long and variable lags of monetary policy” and the fact that “the effects of past rate hikes still yet to fully work its way through”
As interest rates rise, the Financial Conduct Authority in the United Kingdom issued a warning in January that over 750,000 households could default.
Patel stated that he thought there was a “real risk of defaults.” However, keep in mind that the BoE has much better oversight. He added, “I’m more concerned about the effects of the second round, which could result in consumers spending less and possibly overextending non-housing credit.”
Martin Stewart of London Money stated that borrowers were approaching advisers with perspectives ranging from “despair” to pragmatism up to a year earlier than they typically would.
He stated, “We are now in the unenviable position of staring over the abyss where the bodies of the over-leveraged, under-saved, landlords, renters, and owners of discretionary spend businesses are beginning to pile up.” “We are now in the unenviable position of staring over the abyss.”
Stewart stated that he anticipated the personal finance decisions made by so many borrowers to have a macro impact, despite the fact that forecasts for the UK economy have turned more positive in recent months.
He stated, “Many borrowers are telling us that they will need to give up something in order to make room for their new higher payment.” Sadly, that is how recessions begin.