The Growing Mortgage Crisis In The UK As Lending Rates Skyrocket

Experts have issued a warning about a looming cliff edge that could have detrimental effects on the U.K. economy as borrowers face rising mortgage costs during deal renewals, coupled with a shrinking availability of mortgage products. Recent data from financial information company Moneyfacts revealed that the average two-year fixed-rate mortgage for residential properties in the U.K. has reached its highest level since December 1, rising from 5.98% to 6.01%. The spike in rates came after the government’s mini-budget announcement, which caused turbulence in the market. Prior to this, two-year fixed rates above 6% were last observed in November 2008.

The availability of residential mortgage products has also declined significantly, dropping from 5,264 on May 1 to 4,683. Martin Stewart, director of mortgage advisory firm London Money, described the past nine months as “seismic” for the mortgage and housing sector, comparing it to the financial crisis but with different underlying causes. He noted that the market is currently dysfunctional and potentially broken, with evidence of long queues of advisers attempting to secure mortgage products that may no longer be available by the time they reach the front of the line.

Stewart further highlighted the shift in interest rates, noting that most rates now start with a 5, while just two years ago, they typically began with a 1 or even lower. According to Moneyfacts, the average rate for a five-year mortgage currently stands at 5.67%.

When questioned about support for struggling households, Prime Minister Rishi Sunak emphasized the government’s priority of tackling inflation and sticking to their plan during an interview on ITV’s Good Morning Britain program.

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%. A strong labour 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.

With U.K. inflation remaining high at 8.7%, the country faces concerns raised by central bank officials about the potential for sustained inflationary pressures. They have highlighted the second-round effects, such as increased pricing and higher wages, which could contribute to the persistence of elevated inflation levels in the U.K. relative to other developed economies.

Viraj Patel, a senior strategist at Vanda Research, expressed his apprehensions regarding the mortgage market. He noted that over 50% of households have yet to refinance their mortgages at higher rates, adding stress to both the housing market and the broader economy. Patel anticipates that the majority of the consumer slowdown, stemming from increased mortgage costs, will become evident in the latter half of 2023.

Patel emphasized the need for the Bank of England (BoE) and the financial markets to acknowledge the prolonged and variable time lags associated with monetary policy. He cautioned that the effects of previous rate hikes have not fully permeated the economy and warrant consideration.

In January, the U.K.’s Financial Conduct Authority issued a warning, stating that over 750,000 households were at risk of default as interest rates rise. Patel shared concerns of a “genuine risk of defaults,” while highlighting the BoE’s superior oversight. He expressed worry about the potential second-round effects, including reduced consumer spending and potential over-extension in non-housing credit.

Martin Stewart from London Money revealed that borrowers are seeking advice up to a year earlier than usual, with a range of attitudes from despair to pragmatism. Stewart painted a bleak picture, stating that the country is facing a situation where over-leveraged individuals, under-savers, landlords, renters, and owners of discretionary spending businesses are succumbing to the mounting challenges.

While recent forecasts for the U.K. economy have shown signs of improvement, Stewart believes that the personal financial decisions made by many borrowers will have a macro-level impact. He noted that borrowers are already considering sacrificing certain aspects of their lifestyles to accommodate the higher mortgage payments, and he cautioned that such circumstances could contribute to the onset of a recession.