The turmoil of mortgage rates in 2023

Updated: Jun 22, 2023

Rising mortgage rates are going to become not only a huge problem for households but if not tackled empathetically, it may also turn out to be an albatross around the government’s neck.

By: Pooja Shrivastava, Senior Journalist, Asian Media Group

RISING mortgage rates mean not only real pain for homeowners and a catastrophic situation for the property market but might also prove to be a ticking time bomb for the Tory government in the light of the next elections.
Interest rates hit 4.5 per cent in May and further raised to 5 per cent in June, reaching levels not seen since 2008 when a financial crisis hit the world. Before the decision was announced on June 22, financial experts were split on whether the Bank of England would vote for a half-point rise or a smaller quarter-point increase.
While the Bank of England raised interest rates to tackle rising inflation, it has resulted in a sudden increase in mortgage payments for those British homeowners coming off fixed-rate deals, taking the rates to historically new highs.

New figures showed the average two-year fixed rate mortgage on a residential property in Britain rose from 5.98 per cent to more than 6 per cent in the third week of June, getting dangerously close to the 14-year high reached at the end of last year following the disastrous mini-Budget of the short-lived Liz Truss government.

Prior to this, two-year fixed rates were last above 6 per cent in November 2008, the year of global recession and economic slump.

Much of this has been outside the government’s control. It is the double whammy of global supply chain disruption due to Covid and the Russian invasion of Ukraine.

When the Bank of England’s rate rises, so do the rates charged by mortgage lenders. But because most people with homeowner mortgage s in Britain are on fixed-rate deals, the effect is usually delayed until those deals expire. But when they do, the increase in cost can be enormous. And that is precisely why it is a peculiar situation this time.

Two years ago, the government’s stamp duty holiday fueled home buying. Those who took advantage of the holiday opted for a two or three-year fixed deal when rates were much lower. As a result, more than a quarter of UK homeowners, more than 1.4 million households, with fixed-rate mortgages are heading for a sharp increase in monthly payments before the next election. According to the think tank Resolution Foundation, total annual mortgage repayments will rise by £15.8 billion by 2026, as households move onto new, higher fixed-rate deals, implying an extra £2,900 cost for the average household re-mortgaging next year.

Experts fear that rises in interest rates by the Bank of England on June 22 will further jeopardise the housing market overall and could have catastrophic effects on this group of homeowners, who now need to remortgage.

Denying the calls for financial assistance, Chancellor Jeremy Hunt has ruled out providing large-scale assistance to mortgage payers, through tax relief on their mortgage payments, saying such schemes, involving injecting large amounts of cash into the economy, would be inflationary.

He, however, has assured MPs that he will meet major lenders to ask them to show forbearance and flexibility towards households who struggle to pay rising mortgage bills.

“Later this week, I’ll be meeting the principal mortgage lenders to ask what help they can give to people struggling to pay more expensive mortgages and what flexibilities might be possible for families in arrears,” Hunt said on June 20.

Despite Chancellor’s reassuring words, experts dub the situation a “ticking time bomb” as millions of homeowners face a huge jump in their monthly payments when their fixed-rate terms expire.

Though Hunt and prime minister Rishi Sunak seemed adamant about financial support to such households, Tories MPs seemed divided on this matter as to whether to intervene, perhaps with tax relief on mortgage interest.

Lucy Allan, the Tory MP for Telford, warned recently that Britain is heading for a “mortgage catastrophe” due to the surge in borrowing costs this year.

“People [are] telling me their monthly mortgage payment is exceeding their salary. That is unsustainable.”

Backbencher Jake Berry said, “If we don’t help families now, all the other money that we have spent to help them will have been wasted if they lose their homes.”

The market is clearly dysfunctional and broken. Mortgage advisory firms are reporting sudden fluctuations, on the lines that advisers are in queues alongside 2,000 others all trying to secure something that might not exist by the time they get to the front of the queue.

All this volatility is now reflecting as further slowdown in the housing market. Latest market reports claim that asking prices for British homes have fallen for the first time in six years. Constraint on buyer affordability, mainly due to higher borrowing costs, in fact is being touted as the prime factor that brought forward the usual summer slowdown this year.

House prices are already faltering and may fall by up to 10 per cent. Increases in interest rates and monthly mortgage payments could prompt prospective buyers to pause.

There’s no doubt that this will have substantial political consequences as the next general election is supposed to be held no later than January 2025 when angry voters struggling to meet mortgage payments will blame the ruling party. No wonder, Labour has already dubbed the mortgage rise as the “Tory mortgage penalty”.

The only saving grace here is that while borrowers face higher costs, the mortgage crunch has not yet translated into mass repossession to the scale seen in the 1990s.

According to industry group UK Finance, just 1,250 mortgaged properties were taken into possession in the first three months of this year. This was 50 per cent up on the previous quarter, but compared with the numbers that lost their homes during the recession that began in 1990 — the historical peak of repossessions — it barely registers.

A repossession surge would pile further pressure on Sunak, who has rejected calls for direct state support for mortgage holders. However, the same is not expected due to multiple factors, including much-lower interest rates as compared to figures between 1988 and 1991, higher levels of housing equity and regulatory pressure on lenders.