Analysis: Tight UK mortgage market hurts homeowners, economy

LONDON, June 15 (Reuters) – Bedlam in Britain’s 1.5 trillion pound ($1.9 trillion) mortgage market, fueled by turmoil in the money markets, threatens to trigger a renewed slump in housing activity and a financial blow to homeowners on par with the late 1980s. .

Spurred by expectations of a higher interest rate hike by the Bank of England as it battles stubbornly high inflation, lenders have repeatedly pulled home loan offers in recent weeks to keep pace with rising funding costs.

Not only are prospective home buyers and sellers worried, but existing mortgage holders are also squinting at repayments when their fixed-term contracts expire.

„Concern remains at a high level,” said one of Britain’s senior bankers, pointing to volatility in product rates and availability that has made it difficult for both lenders and borrowers to make their payments.

„It’s the anxiety it creates that does the long-term damage,” the banker said.

Investors are waiting to see how badly this will affect housing market activity as it recovers in early 2023 from the autumn turmoil triggered by former prime minister Liz Truss’ „mini-budget” economic agenda.

The housing market is important in Britain’s consumption-driven economy and is closely linked to consumer confidence.

HSBC ( HSBA.L ) became the latest major lender to announce a shake-up to its mortgage lineup on Wednesday, with higher interest rates set to take hold on Thursday.

„We remain firmly focused on supporting customers through the current pressures and providing access to good deals. However, the cost of funds has increased in recent days and, like other banks, we need to reflect that in our mortgage rates,” HSBC said. A statement.

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According to property data provider Moneyfacts, the average mortgage rate on new two-year mortgage deals rose to 5.90% on Wednesday – the highest since December last year, since the mini-Budget.

At 6%, homeowners would be paying the same financial burden as they did in the late 1980s, when mortgage rates were around 13%, according to housing market analyst Neil Hudson, founder of consulting firm BuildPlace.

Aside from tax and loan product changes — the ratio has risen from 2.0 in the late eighties to 3.5 today — Hudson’s analysis takes into account the fact that today’s mortgage borrowers are borrowing more against their income.

„It would take a much lower mortgage rate to create the same amount of financial pressure as the double-digit mortgage rate repayments of previous periods,” Hudson said.

Reuters Graphics

mental stress

The question now is how mortgage market pressure will feed into the real economy.

Two-year swap rates — a key determinant of mortgage borrowing costs — have risen 95 basis points in the past two months.

Historically, increases of 85 basis points or more have foretold large annual declines in housing starts in subsequent quarters — as happened in 1989, 1994 and 2008 when replacement rates spiked, according to a Reuters analysis.

Jamie Lennox, director of broker Dimora Mortgages, said there was „no end in sight” to the problems in the mortgage market.

„This is not the news that hundreds of thousands of homeowners want to hear, and it will send shivers down their spines,” he said.

Financial markets have seen the BoE’s full cost of ownership rate now rise to 5.75% from 4.5%, within touching distance of the 6% mark the BoE used in its stress test of major financial institutions last year – a point not lost on bank executives.

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A Reuters poll of economists released on Wednesday pointed to a lower peak of 5.0% later this year, although some thought it could go higher.

Senior bankers say they want to lend through the storm and resell mortgage products as soon as possible to stay open for business.

But product rates must be synchronized with the swap curve, which reflects the market price of the money they lend.

So borrowers should expect volatility in mortgage rates until swap rates fall, those bankers say, and policymakers can’t be sure when that will start until they get more control over inflation.

As that battle rages, lenders must increase due diligence to ensure borrowers are comfortable repaying loans at higher rates, to avoid falling foul of consumer protection regulations, and to reduce the risk of future defaults.

The BoE insists this is not a repeat of the 2007-09 financial crisis, and banks today are much better capitalized – in theory they can keep lending open through tougher economic conditions.


So far, British households have proved surprisingly resilient to sharp rises in the prices of everyday goods and rapid rises in interest rates that have pushed up mortgages, credit cards and other financial costs.

Most bankers attribute this strength to large savings accumulated during pandemic lockdowns, but with inflation at historically high levels, Britons are once again using debt to support lifestyle spending habits such as travel and entertainment.

„The long and short of it is that a large number of households face a sharp increase in their mortgage payments over the course of the year,” Philip Shaw, chief economist at Investec, told Reuters.

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„Overall what is expected is a material slowdown in spending, which is why we suggest the economy will fall into a mild recession, largely because of this,” he added.

The consensus from a Reuters poll published on Wednesday suggested Britain should avoid recession but instead settle for weaker growth.

Additional reporting by Lucy Raitano and Ian Withers; Editing by Kirsten Donovan

Our Standards: Thomson Reuters Trust Principles.

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