UK mortgage borrowers reeling from soaring rates
Millions of mortgage borrowers in the UK prepare for huge increases in their monthly payments due to the run on the pound.
Markets have been in turmoil since UK Finance Minister Kwasi Kwarteng announced the biggest tax cuts in 50 years on Friday, with a sharp increase in government borrowing, sending the pound down to a record low against the US dollar.
Some analysts now expect the Bank of England to raise the borrowing cost at 6% next year, against 2.25%, to support the currency and convince the markets that it is committed to controlling inflation.
“It is difficult not to draw the conclusion that [recent events] will require a significant monetary policy response,” Huw Pill, the central bank’s chief economist, told the Barclay’s-CEPR International Monetary Policy Forum on Tuesday, according to a Reuters report.
Markets were already expecting the central bank to raise interest rates to 4.75% by next spring. That would have added £201 ($217) to a typical homeowner’s monthly payment on an outstanding £146,000 ($157,000) fixed-rate mortgage, said Laura Suter, the investment firm’s personal finance manager. AJ Bell at CNN Business. Now, borrowers face an even greater precipice.
There are 9 million outstanding residential mortgages in the UK, according to UK Finance, an association of banks and financial services companies. About 20% of these loans are trackers or variable rate products, which generally become more expensive when the central bank raises rates. The rest is fixed rate loans.
But up to 1.8 million borrowers will need to refinance next year, according to the Resolution Foundation. Neal Hudson, housing market analyst at research firm BuiltPlace, estimates that around 300,000 fixed-rate transactions will close between October and December. These borrowers face a sudden increase in their monthly payments if they refinance.
If the base rate rises to 6%, someone refinancing a 20-year fixed-rate mortgage of £146,000 ($157,000) would have to pay an additional £309 ($333) per month, according to Suter. That’s £108 ($116) more than expected before the pound crash.
Many borrowers will not be able to cope. Samuel Tombs, chief economist at Pantheon Macroeconomics, said in a report on Tuesday that a mortgage rate of 6% would “lead to a sharp increase in mortgage defaults.”
It calculates that the average household refinancing a 2-year fixed-rate mortgage in the first half of next year would see their monthly repayments jump by 73% to £1,490 ($1,607), an increase equivalent to around 14% of disposable income.
“Mortgage arrears and defaults would rise as house prices were likely to fall, putting enormous pressure on banks’ balance sheets,” he said in the report.
Banks are already becoming more risk averse as they struggle to reprice their mortgages in such volatile markets.
Since Friday, lenders have withdrawn more than 350 mortgage products in response to the turmoil, according to Moneyfacts, a financial product comparison website.
Halifax, owned by Lloyds Bank (LLDTF), cut some of its mortgage products, while Virgin Money stopped taking mortgage applications from new customers until later this week.
(SAN) said it would scrap mortgages worth 60% and 85% of a property’s value for new UK customers and raise rates for ‘new and existing customers from 10pm tonight’.
“Customers who have already applied at this time will not be impacted,” a company spokesperson told CNN Business in a statement.
Borrowers are worried. Online searches for “remortgage” more than doubled in the UK on Monday, according to analysis of Google search data by Loan Corp, a mortgage broker.
Some may now struggle to find deals.
“Those with smaller deposits or trying to borrow at their maximum financial capacity might find it harder to get a mortgage deal or pay even higher rates to do so,” Suter said.
— Julia Horowitz contributed reporting.