What might a crisis in mortgage lending mean for homeowners and renters?
The ‘stress’ caused by current rates, which are close to 6%, is comparable to double-digit rates in the 1980s.
The Bank of England is anticipated to hike interest rates for the thirteenth straight time on Thursday, which has added to the already dire situation facing homeowners and renters this week. Treasury relief for mortgage borrowers has been ruled out by Rishi Sunak, who instead insists that the government will “stick to the plan” in bringing inflation down.
A recent study found that nearly half of borrowers worry they will have trouble making their mortgage payments within a year. In response, banks pulled mortgage packages and raised rates.
Ministers asked banks this week to take action to protect mortgage holders who are having repayment issues, as markets are forecasting interest rates to reach around 6% in the coming months and government borrowing costs to surpass even the peak witnessed during Liz Truss’ mini-Budget collapse.
Despite expecting that banks “will fall over themselves to come up with ways not to repossess” people’s homes, one analyst told The Independent that the chaos was “going to sting a lot of people” and cautioned that renters will ultimately be the ones to suffer the most.
What is the increase in mortgage rates?
Homeowners have already experienced sharp increases in their costs; according to a recent Labour research, since the mini-Budget that rattled the markets last September, median interest repayments have increased by £150 per week, or £7,000 annually.
The Centre for Economics and Business Research think tank (CEBR) now anticipates the two-year 75% loan-to-value mortgage rate to hit an average of 5.1% in 2023. This is because the Bank of England is now expected to increase rates even more steeply than anticipated after inflation did not decline as predicted last month.
According to the analytics company MoneyFacts, rates for fixed-rate house loans have increased by 0.5% just in the last two weeks. According to broker L&C Mortgages, those with a typical £200,000 mortgage with a 25-year term will now spend an average of £977 per month in interest.
Neal Hudson, an analyst at Built Place, claims that because the amount borrowed is currently much larger in comparison to people’s income, today’s rates of over 6% will result in homeowners experiencing the same amount of “stress” as the double-digit interest rates of the 1980s.
Ian Stuart, the head of HSBC, stated in an interview with BBC Radio 4’s now programme that his bank anticipates “rates will probably increase a little more and will probably stay a little higher for longer” and won’t start to fall significantly “until inflation is much lower than it is today.”
What does it mean for those whose contracts with set terms are about to expire?
The CEBR estimates that over the next two years, 2.6 million consumers will switch from cheaper fixed-term agreements, resulting in an increase in payments of £8.7 billion, with southeast England experiencing the largest increases.
Given that it has been two years since the SDLT holiday, Mr. Hudson told The Independent that “the big increase in interest rates will be concerning for those coming to the end of their fixed rate periods, of which there will be a large number.”
“Borrowers will surely struggle if rates remain this high, especially in light of the crisis in the cost of living. The market is now predicting a rise in the Bank of England base rate, but perhaps inflation will decline shortly.
Mortgage payments for customers whose old arrangements have ended are on average roughly 26% higher each month, according to broker London Money, The Times said.
There is “no doubt that people are really having to rethink their personal finances,” according to Mr. Stuart of HSBC, who also noted that switching from an older rate of, say, 1.5% to something like 5% will have a significant impact on your monthly budget.
How may lenders respond to rate increases?
What banks do in response to many homeowners facing “the ice-cold reality of 2023 rates” will be critical. According to buying agent and property expert Henry Pryor, lenders “want to be seen to be helping” their clients in order to avoid being perceived as “villians” in the wake of the financial crisis.
Existing mortgage holders, especially those with fixed-rate programmes, will undoubtedly have a Wim Hof moment when the icy reality of 2023 rates hits their doormat or inbox, according to Mr. Pryor.
“They would have undergone a stress test before obtaining their two or five-year fixed mortgage to ensure that they could pay for rates as high as 7% even if they never anticipated it happening.
“I believe that most people will make sacrifices and save money in order to continue making the higher payments; very few people will want to go through repossession,” she said. Lenders will do every effort to find alternatives to repossession for people who are unable to pay.
Mortgages with a 25-year term will be increased to 30 or 35 years. To avoid playing the villains of the story once more, as they did in 2009 following the global financial meltdown, they will switch borrowers to interest-only payments for a period of time like five years.
After being bailed out of their crisis, banks have only just been welcomed back into polite society. Even though they will still benefit financially from their support, they want to appear to be helpful this time.
What impact will this have on renters?
With worries that declining earnings may result in a widespread exodus of landlords and properties from the market, many of whom have already increased rents to cover their expenditures, renters are also anticipated to face the burden of rising prices.
“Tenants will find their landlords looking pale if they have a mortgage, as many buy-to-let investors do,” Mr. Pryor added. Although most will attempt to raise their rates, it appears unlikely that tenants will be able to pay much more. Some will then sell their property while giving their tenant notice.
“This will increase the demand for rental houses and drive rent prices even higher. Tenants cannot or should not borrow money to pay their rent, and some will struggle more than mortgage debtors who at least have the option of downsizing and selling their homes.
Mr. Pryor warned that “this is going to sting a lot of people” and that many homeowners, who make up about a third of families, “will see a drop back in their standard of living as they cut back to afford” it.
But according to Mr. Pryor, “we will doubtless see the biggest impact” in the private renting market, including some of the four million renters becoming homeless.
Will the government step in and help?
Recent days have seen a rise in worries, raising the possibility of intervention by the government to assist homeowners.
Sam Brodbeck, the money advice editor for the Daily Telegraph, said it “feels like the [government] will be intervening sooner rather than later.” Senior editor of the New Statesman George Eaton added that he “would not be surprised if the government ends up subsidising mortgages.”
The housing minister Rachel Maclean appeared to claim on a BBC panel show that “a mortgage support scheme” is in the works, but she provided no further information. This contrasts with Downing Street’s strongest statements, which merely stated that the government expected mortgage lenders to protect homeowners facing rate increases.
What can individuals do to keep up with payments?
In a poll conducted this week for The Times by YouGov, 30% of borrowers said they now find it “difficult” to make their mortgage payments, and 46% said they expect it to be so in a year.
People may be able to take a number of actions to make their mortgage payments easier, including switching to interest-only deals, which leave your capital balance unpaid; attempting to lengthen the term of their mortgage, if possible; requesting a “consent to let” agreement from their lender to rent out their property; or attempting to use an offset mortgage to lower interest payments.