Brits are facing a major mortgage crisis as lending rates soar

LONDON – British borrowers are facing a precipice that could hurt the economy, experts warned on Monday, as rising mortgage costs affect deal renewals and the number of available products dwindles.

New data from financial information company Moneyfacts showed the average two-year fixed-rate mortgage on UK residential property rose to 6.01% from 5.98% on Friday, the highest level since December 1.

The surge in late 2022 came after the government stunned markets with a mini-budget. Before that, Moneyfacts said the last time two-year fixed rates were above 6% was in November 2008.

The number of residential mortgage products available also fell, to 4,683 from 5,264 on May 1.

Martin Stewart, director of mortgage consultancy London Money, said the past nine months had been an “earthquake” for the mortgage and property sectors, “on par with the financial crisis”, although for different reasons.

Stewart told CNBC: “The market is dysfunctional, it’s broken, so to speak. We’ve seen evidence that advisors are lining up with 2,000 other people, all trying to get access to assets that might not actually exist when they got to the top of the queue. thing.”

“Almost everything starts with a 5 now…for context, two years ago everything started with a 1 or lower.”

The average rate on a five-year mortgage is currently 5.67%, according to Moneyfacts.

Asked about support for struggling families, Prime Minister Rishi Sunak told ITV’s Good Morning Britain on Monday, The government’s priority is to halve inflation and it needs to “stick to the plan”.

bank includes HSBC Spain and Santander have temporarily withdrawn mortgage products in recent weeks due to market uncertainty.

Meanwhile, short-dated UK government bond yields climbed, with the 2-year yield hitting a fresh 15-year high on Monday.

The market is pricing in a peak rate of close to 6%, up from the current 4.5%. A strong labor market report on June 13 boosted interest rate expectations, with the Bank of England due to announce its latest rate decision on Thursday after raising rates for the 12th straight time in May.

Meanwhile, UK inflation remains at 8.7%, the highest of any advanced economy, and central bankers have warned that second-round effects, including price setting and wage increases, are likely to remain elevated for longer.

“I think the worst of the mortgage squeeze is here,” said Viraj Patel, senior strategist at Vanda Research, noting that more than 50% of households are still remortgaging at higher rates, which will hurt the housing market and the broader economy. The economy is under pressure.

Patel said he expects “the main cause of the consumer slowdown due to higher mortgage costs” to emerge in the second half of 2023.

“The BoE and markets need to be aware of the long and variable lags in monetary policy – the impact of past rate hikes is still not fully felt,” he told CNBC.

Britain’s Financial Conduct Authority warned in January that more than 750,000 households were at risk of default as interest rates rose.

Patel said he believed there was a “real risk of default”. “But it remembers that the Bank of England has better oversight. I’m more concerned about second-round effects, with lower consumer spending, potentially overextending non-housing credit,” he added.

Martin Stewart of London Money said lenders were engaging with advisers a year earlier than usual, with attitudes ranging from “desperation” to pragmatism.

“We are now in the enviable position of staring into the abyss into which overleveraged, under-saved landlords, renters and owners of discretionary spending businesses are starting to pile up,” he said.

While forecasts for the UK economy have turned more positive in recent months, Stewart said he expected the personal finance decisions made by so many borrowers to have macro implications.

“Many borrowers told us they needed to give up something to accommodate the new higher repayments,” he said. “Unfortunately, that’s how the recession started.”

— CNBC’s Ganesh Rao contributed to this report