BRITAIN’S MORTGAGE machine continues to break records. This summer interest rates on mortgages rose at their fastest pace in a decade, thanks to increases in the Bank of England’s base rate aimed at taming inflation. Then financial turmoil caused by the government’s disastrous—and now mostly scrapped—mini-budget in September forced banks to suspend hundreds of mortgage products, leading to a crash in the availability of loans. According to data released by the lender Nationwide on November 1st, house prices fell last month for the first time in 15 months. And mortgage rates have now spiralled to their highest since 2008. At the end of October, the average two-year and five-year fixed rates jumped to 6.48% and 6.33%, respectively, according to Moneyfacts, a data provider. This is more than double the rates of a year ago. In mid-October the Resolution Foundation, a think-tank, forecast that fixed rates could soar above 6% and floating ones to 8%. On November 3rd the Bank of England will announce its latest interest-rate decision. Investors expect an increase of 0.75 percentage points, the biggest jump in more than 30 years, to 3%. Where does this leave borrowers?
By the end of 2024, the annual bill for one in five British households will increase by an average of £5,100 ($5,854), according to the Resolution Foundation’s latest estimates. The think-tank expects that in London annual payments for households will rise by £8,000. Borrowers on the lowest incomes will bear the brunt of the storm. Those towards the bottom of the scale will fork out an extra 10% of their income on housing costs by the end of 2024, compared with around 4% for those at the top. For now, mortgage arrears and repossessions are at historic lows—thanks partly to stubbornly-low rates of the past few years. But they could rise from 0.7% of mortgages now to 1.6% in 2024, according to Capital Economics, a consultancy.
The risk of negative equity, when a property is worth less than the loan that it is collateral for, also looms. In Britain, a fall in house prices of 20% would leave up to 5% of mortgages in negative equity, according to Neal Hudson of Residential Analysts, another consultancy. That would rise to around one in ten households with a mortgage in London. Most vulnerable are first-time buyers and recent borrowers, many of whom purchased a home as prices rocketed after a temporary cut of stamp-duty (a tax on house purchases) in 2020. Many have less savings and have had less time to build up equity.
All this uncertainty means that banks are pulling the riskiest mortgage products off the shelves. This will make it even harder to get on the housing ladder. Cash-strapped young professionals with small deposits will be especially stretched. In the year to October, lenders withdrew 60% of mortgage products that required only a 5% downpayment. For mortgages requiring a 10% deposit, the number had fallen by nearly half. Would-be buyers may welcome a slump in the housing market. Yet if rates continue to rise, consumers’ ability to borrow to spend on houses, and anything else, will plummet further. Property may get cheaper. Mortgages won’t. ■
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