In what some are calling the ‘Mortgage Meltdown’, the United Kingdom is experiencing a disaster of its own making. Not through some random act of nature or through the stealthy intrigue of war, but as a direct result of fiscal policy decisions and their rippling consequences. We’re currently witnessing a shock to the financial system that’s similar to watching a tsunami in slow motion, with the Bank of England at the centre of this storm.
The Impact of Rising Interest Rates on Mortgage Rates and Payments
The root of the disaster lies in the bank’s unanticipated quick-draw response to mounting inflationary pressures, the seeds of which were sown in the aftermath of the pandemic. The Bank of England, playing catch-up with the rampant inflation, jacked up interest rates, touching a staggering 4.5%. This reaction has sent seismic shockwaves throughout the country, impacting every household with a mortgage.
In response to the shock inflation print last month, the markets are now bracing for interest rates to scale up to 5.75% by 2024. This dramatic divergence between the UK and the U.S. inflation rates is a stark reminder of how global crises are dealt with differently across nations, often resulting in unique sets of problems.
This chain of events — increased inflation leading to higher interest rates, which in turn, lead to higher swap rates, consequently driving up mortgage rates and hence, mortgage payments — has created a financial whirlpool that’s sucking households deeper into debt.
The facts and figures are stark. A two-year fixed mortgage that stood at 5.35% in early June has now crept close to 6%. A five-year fix is now at a staggering 5.62%. With these shifts, some lenders are pulling back, leaving fewer options for homeowners.
So, why is the UK finding itself in a deeper quagmire compared to its international counterparts, say, the U.S.?
Impending Challenges for 1.6 Million Households: Expired Fixed-Rate Mortgages
One of the major contributors to this calamity is the unique structure of the UK mortgage market. Unlike the U.S., where a majority of mortgages are based on long-term fixed-rate contracts, the UK tends to lean more towards variable rates or short-term fixed-rate contracts. This structure means that as fixed-rate mortgages expire, they will have to be refinanced at much higher rates, significantly inflating homeowners’ mortgage payments.
As we enter 2024, nearly 1.6 million UK households will find their fixed-rate mortgages expiring, meaning they’ll be exposed to these higher interest rates, leading to a potential hike of £2,900 in their mortgage payments, as per the Resolution Foundation.
This financial melee strikes at a time when households are already grappling with the aftermath of the pandemic and the ongoing Lis Truss/Kwasi Kwarteng fuelled gilt crisis. This is not just a disaster for individual households, but a colossal mess that the Bank of England and the government need to untangle.
House Prices Hold Steady, but Government Support Remains Uncertain
Surprisingly, house prices haven’t crashed yet. Wage growth remains robust, unemployment is low, and the UK has skilfully dodged a recession. Plus, those with fixed-rate mortgages are understandably reluctant to sell. But with Prime Minister Rishi Sunak and Chancellor Jeremy Hunt ruling out government support, it’s hard to fathom how many households will grapple with such a steep increase in monthly payments.
It’s an economic tempest that’s just beginning to unravel, with no end in sight. Higher, for longer — a sobering reality for the UK’s households and a looming nightmare for the Bank of England. Time will tell how this financial crisis will reshape the UK’s housing market and its economy, but for now, all we can do is hold our breath and hope for the best.
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