Brits face major mortgage crisis as interest rates soar

LONDON – UK borrowers face a cliff that could hurt the economy as rising mortgage costs affect deal renewals and the number of products available shrinks, experts warned Monday.

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

The increase at the end of 2022 occurred as a result of the government’s decision mini-budget that shakes the market. Prior to this, Moneyfacts said that two-year fixed rates were last above 6% in November 2008.

The number of residential mortgage products available has also been reduced, 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 housing and mortgage sector, “on par with the financial crisis”, albeit with different causes.

“The market is dysfunctional and arguably not working. We’ve seen evidence that advisors are in the queue along with 2,000 others, all trying to secure something that might not actually exist when they get to the front of the queue,” Stewart told CNBC.

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

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

When asked about supporting struggling households, Prime Minister Rishi Sunak told ITV’s Good Morning Britain program on Monday that the government’s priority was to cut inflation in half and it needed to “stick to plan.”

benches included HSBC and Santander have temporarily took out mortgage products in recent weeks amid market uncertainty.

Coming as UK government at short notice bond yields move higher, with the 2-year yield hitting a new 15-year high on Monday.

Markets are pricing in top interest rates of almost 6%, up from 4.5% today. A strong labor 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 walk In May.

Meanwhile, UK inflation remains among the highest of all developed economies in 8.7%with central bank officials noting that second-round effectsincluding higher pricing and wages, you could keep it higher for longer.

“I think the worst of the mortgage crisis is yet to come,” said Viraj Patel, a senior strategist at Vanda Research. He noted that more than 50% of homes have yet to re-mortgage at higher rates and this will add stress to the housing market and the economy in general.

Patel said he expected “most of the slowdown in consumption from higher mortgage costs” to come home in the second half of 2023.

“The BoE and markets need to be mindful of long and variable monetary policy lags, with the effects of previous rate hikes yet to be fully resolved,” he told CNBC.

The UK’s Financial Conduct Authority warned in January that more than 750,000 households were at risk of default as rates rise.

Patel said he believed there was a “real risk of default.” “But it’s to remember that the BoE has much better oversight. I’m more concerned about second-round effects, consumers are spending less and perhaps overextending non-home loans,” he added.

London Money’s Martin Stewart said lenders were approaching advisers up to a year earlier than normal, with attitudes ranging from “desperation” to pragmatism.

“We are now in the unenviable position of staring into the abyss where the bodies of over-leveraged discretionary spending and under-saving homeowners, renters and business owners are beginning to pile up,” he said.

While forecasts for the UK economy have became more positive In recent months, Stewart said he expected the personal financial decisions made by so many borrowers to have a macro impact.

“Many borrowers tell us they will have to give up something to accommodate their new higher payment,” he said. “Unfortunately, this is how recessions start.”

— CNBC’s Ganesh Rao contributed to this report