The variety of options available is decreasing and growing mortgage costs are impacting agreement renewals, experts warned on Monday (June 19, 2023), putting London’s U.K. borrowers on a precipice that might harm the economy.
New figures from financial information company Moneyfacts showed the average two-year fixed rate mortgage on a residential property in Britain rose from 5.98% Friday to 6.01%, its highest level since Dec 1.
The spike in late 2022 came in the wake of the government’s market-rattling mini-budget. Prior to this, Moneyfacts said two-year fixed rates were last above 6% in November 2008.
The number of residential mortgage products available has also fallen, from 5,264 on May 1 to 4,683.
Martin Stewart, director of mortgage advisory London Money, said the last nine months had been “seismic” for the mortgage and housing sector, “on a par with the financial crisis,” although with different causes.
“The market is dysfunctional and arguably broken. We have seen evidence where advisers are in queues alongside 2,000 others all trying to secure something that might not actually exist by the time they get to the front of the queue,” Stewart told CNBC.
“Pretty much everything is starting with a 5 now … for context, two years ago everything started with a 1 or lower.”
The average rate for a five-year mortgage is currently 5.67%, according to Moneyfacts.
Asked about support for struggling households, Prime Minister Rishi Sunak on Monday told ITV’s Good Morning Britain program that the government’s priority was halving inflation and it needed to “stick to the plan.”
Banks including HSBC and Santander have temporarily pulled mortgage products in recent weeks amid market uncertainty.
It comes as short-term U.K. government bond yields climb, with the 2-year yield hitting a fresh 15-year high Monday.
Markets are pricing in peak interest rates of almost 6%, up from the current 4.5%. The Bank of England is scheduled to publish its most recent interest rate decision on Thursday after enacting its 12th straight boost in May, which raised expectations for rates following a positive labor market report on June 13, 2023.
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.
“I think the worst of the mortgage crunch is ahead of us,” said Viraj Patel, senior strategist at Vanda Research. He noted that more than 50% of households are still to remortgage at higher rates and this will add stress to the housing market and wider economy.
Patel said he expected the “bulk of the consumer slowdown coming from higher mortgage costs” to hit home in the second half of 2023.
“The BoE, and markets, need to be aware of the long and variable lags of monetary policy with the effects of past rate hikes still yet to fully work its way through,” he told CNBC.
The U.K.’s Financial Conduct Authority in January warned more than 750,000 households were at risk of default as rates rise.
Patel said he believed there was a “genuine risk of defaults.” “But it’s remembering the BoE have much better oversight. I’m worried more about the second-round effects, consumers spending less and perhaps over-extending in non-housing credit,” he added.
London Money’s Martin Stewart said borrowers were approaching advisers up to a year earlier than they normally would, with attitudes ranging from “despair” to pragmatism.
“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,” he said.
Even though predictions for the British economy have improved recently, Stewart said he anticipated that the macroeconomic effects of the personal financial decisions made by so many borrowers.
“Many borrowers are telling us that they will need to give something up in order to accommodate their new higher payment,” he said. “Unfortunately that is how recessions start.”
