Houses pictured on June 8, 2023 in Halifax, United Kingdom. British borrowers have to reckon with significantly higher mortgage costs.
Mike Kemp | In Pictures | Getty Images
LONDON — British borrowers are facing a cliff that could hurt the economy as rising mortgage costs hurt contract renewals and the number of available products shrinks, experts warned on Monday.
New figures from financial information firm Moneyfacts show that the average two-year fixed-rate mortgage on a home in Britain rose to 6.01% from 5.98% on Friday, the highest since December 1.
The late 2022 surge came on the back of the government’s market-worrying mini-budget. Previously, Moneyfacts stated that two-year fixed rates were last above 6% in November 2008.
The number of available residential mortgage products has also fallen to 4,683 from 5,264 on May 1st.
Martin Stewart, director of mortgage adviser London Money, said the past nine months have been “seismic” for the mortgage and property sectors, “on par with the financial crisis”, albeit with different causes.
“The market is dysfunctional and probably broken. We’ve seen evidence of advisors queuing alongside 2,000 others, all trying to secure something that may not already exist when they’re at the front of the line,” Stewart told CNBC.
“Now pretty much everything starts with a 5…for comparison, two years ago it all started with a 1 or lower.”
According to Moneyfacts, the average interest rate on a five-year mortgage is currently 5.67%.
Asked about support for struggling households, Prime Minister Rishi Sunak told ITV’s Good Morning Britain program on Monday. The government’s priority was to halve inflation and it had to “stick to the plan”.
banks incl HSBC and Santander have temporarily suspended mortgage products in recent weeks due to market uncertainty.
This comes at a time when short-dated UK government bond yields are rising, with the 2-year yield hitting a new 15-year high on Monday.
Markets are pricing in a prime interest rate of almost 6% versus the current 4.5%. A strong jobs report on June 13 lifted interest rate expectations and the Bank of England is due to announce its latest interest rate decision on Thursday, following its 12th consecutive rate hike in May.
Meanwhile, UK inflation remains among the highest of any developed economy at 8.7%, with central bank officials warning that second-round effects, including price fixing and higher wages, could keep it higher for longer.
“I think the worst of the mortgage crisis is ahead,” said Viraj Patel, senior strategist at Vanda Research. He pointed out that more than 50% of households have yet to refinance their mortgages at higher interest rates, which will put additional strain on the housing market and the broader economy.
Patel said he expects “the bulk of the consumer slowdown due to higher mortgage costs” to be felt in the second half of 2023.
“The BoE and markets need to be mindful of the long and erratic lags in monetary policy – with the impact of past rate hikes not yet fully overcome,” he told CNBC.
Britain’s Financial Conduct Authority warned in January that as interest rates rise, more than 750,000 households could default.
Patel said he believes there is a “real risk of non-payment.” “But I remember the BoE has much better oversight. I’m more concerned about the second-round effects, where consumers will spend less and potentially over-borrow non-housing,” he added.
London Money’s Martin Stewart said borrowers had been reaching out to advisers up to a year earlier than they normally would, with attitudes ranging from “desperation” to pragmatism.
“We are now in the unenviable position of looking down the abyss where the corpses of the over-indebted, underserved landlords, tenants and owners of discretionary spending businesses are beginning to pile up,” he said.
While forecasts for the UK economy have turned more positive in recent months, Stewart believes the personal finance decisions of so many borrowers will have macroeconomic implications.
“Many borrowers tell us they have to give up something to make their new higher payment,” he said. “Unfortunately, that’s how recessions start.”
— CNBC’s Ganesh Rao contributed to this report