- The average two-year fixed mortgage rate on residential property in Britain rose from 5.98% Friday to 6.01%, its highest level since December 1st.
- “We are now in the unenviable position of staring into the abyss as the bodies of over-leveraged, under-saving landlords, renters and discretionary-spending businesses begin to pile up,” said Martin Stewart, director of Mortgage Advice. London Money.
- Short-term British bond yields are at a 15-year high and markets are pricing in maximum interest rates closer to 6%.
Homes is photographed on June 8, 2023 in Halifax, United Kingdom. UK borrowers are facing a sharp rise in mortgage costs.
Mike Kemp | Pictures | Getty Images
Experts warned on Monday that UK borrowers faced a damaging cliff edge for the economy as rising mortgage costs affected renewal deals and fewer products were available.
New figures released by financial information company Moneyfacts showed that the average two-year fixed mortgage rate on residential property in Britain rose from 5.98% Friday to 6.01%, its highest level since December 1.
The spike in late 2022 came on the heels of the government’s mini-budget that rocked the market. Prior to that, Moneyfacts said two-year flat rates were above 6% in November 2008.
The number of mortgage products available also decreased from 5,264 on May 1 to 4,683.
Martin Stewart, director of mortgage advisory at London Money, said the past nine months have been “seismic” for the mortgage and housing sector, “on a par with the financial crisis”, although for different reasons.
“The market is dysfunctional and arguably broken. We’ve seen evidence of advisors queuing up along with 2,000 others all trying to secure something that may not really be there by the time they get to the front of the queue,” Stewart told CNBC.
“Almost everything starts with No. 5 now… For context, two years ago it all started with No. 1 or less.”
The average rate for a five-year mortgage is currently 5.67%, according to Moneyfacts.
Asked about support for struggling families, Prime Minister Rishi Sunak on Monday told ITV’s Good Morning Britain that The government’s priority was to cut inflation in half and it had to “stick to plan”.
Banks including HSBC and Santander have temporarily pulled mortgage products in recent weeks amid market uncertainty.
It comes as short-term UK government bond yields soar, with the two-year bond yield hitting a 15-year high on Monday.
Markets are pricing maximum interest rates at around 6%, up from the current 4.5%. A strong labor market report released on June 13 sent interest rate expectations higher, as the Bank of England prepares to announce its latest interest rate decision on Thursday after enacting its 12th consecutive hike in May.
Meanwhile, UK inflation remains among the highest of all developed economies at 8.7%, with central bank officials warning that second-round effects, including price fixing and higher wages, could keep them higher for longer.
“I think the worst of the mortgage crisis lies ahead,” said Viraj Patil, chief strategist at Vanda Research. He noted that more than 50% of families are still remortgaging at higher rates, and this will add pressure on the housing market and the broader economy.
Patel said he expects “the bulk of the consumer slowdown caused by rising mortgage costs” to come home in the second half of 2023.
“The BoE and the markets need to be aware of the long and volatile delays to monetary policy – as the effects of past interest rate increases are still fully working their way through,” he told CNBC.
The UK’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 remember, the Bank of England has much better supervision. I’m more worried about the second round effects, consumers are spending less and they may be over-expanding non-residential credit,” he added.
Martin Stewart of London Money said borrowers are reaching out to advisors a year earlier than they usually do, and attitudes range from “desperation” to pragmatism.
“We are now in the unenviable position of staring into the abyss as the bodies of landlords, landlords, tenants and discretionary spending businesses who suffer from a shortage of leverage and savings are beginning to pile up,” he said.
While the outlook for the UK economy has become more positive in recent months, Stewart said he expects the personal finance decisions made by many borrowers to have a significant impact.
“Many borrowers tell us they will need to give up something to accommodate their new, higher payments,” he said. “Unfortunately, this is how recessions begin.”
— CNBC’s Ganesh Rao contributed to this report
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