# Analysis-Spasms in UK mortgage market spell pain for homeowners, economy Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2023-06-15 Category: NEWS Category URL: https://financedigest.com/category/news Meta Title: Bedlam in Britain's Mortgage Market: Pain Ahead for Meta Description: Read about the turmoil and consequences of the 1.5 trillion-pound mortgage market in the UK, causing anxiety and financial pain for homeowners. URL: https://financedigest.com/analysis-spasms-in-uk-mortgage-market-spell-pain-for-homeowners-economyhtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/2023-06-15t081230z2lynxmpej5e078rtroptp4britain-economy-housing-1736813880393-compressed.jpg) # Analysis-Spasms in UK mortgage market spell pain for homeowners, economy By Andy Bruce and Sinead Cruise LONDON (Reuters) – Bedlam in Britain’s 1.5 trillion-pound ($1.9 trillion) mortgage market, fueled by ructions in money markets, threatens to trigger a renewed slump in housing activity and financial pain for homeowners on a par with the late 1980s. Lenders have repeatedly re-priced and pulled home loan offerings in recent weeks in a scramble to keep up with soaring funding costs, spurred by expectations for more interest rate hikes from the Bank of England as it battles stubbornly high inflation. It’s not just [prospective home](https://www.financedigest.com/home-furniture-market-industry-outlook-growth-prospects-and-key-opportunities.html "Home Furniture Market: Industry Outlook, Growth Prospects and Key Opportunities") buyers and sellers who are worried, but also existing mortgage holders who face eye-watering increases in repayments when their fixed-term deals expire. Anxiety is at a high level,” one of Britain’s most senior bankers’ said, pointing to the instability in [product rates](https://www.financedigest.com/food-grade-phosphates-market-regional-industry-segmentation-analysis-by-production-consumption-revenue-and-growth-rate-by-2027.html "Food Grade Phosphates Market Regional Industry Segmentation, Analysis by Production, Consumption, Revenue and Growth Rate by 2027") and availability which have made it harder for both lenders and borrowers to do their sums. “It’s the anxiety that this creates that causes longer damage,” the banker said. Investors are waiting to see how badly this will hurt housing [market activity](https://www.financedigest.com/the-plant-activators-market-to-witness-steadfast-growth.html "The Plant Activators Market To Witness Steadfast Growth"), which recovered in early 2023 from the autumn turmoil triggered by the “mini-budget” economic agenda of former prime minister Liz Truss. The housing market has totemic importance in Britain’s consumption-driven economy and is closely linked to [consumer confidence](https://www.financedigest.com/asian-shares-rise-after-consumer-confidence-boosts-nasdaq-to-record-high.html "Asian shares rise after consumer confidence boosts Nasdaq to record high"). HSBC became the latest [major lender on Wednesday to announce](https://www.financedigest.com/growth-street-announces-major-new-hires.html "Growth Street announces major new hires") a shake-up in its mortgage line, with higher rates set to take hold on Thursday. We’re firmly focused on supporting customers through current pressures and [providing access to good deals](https://www.financedigest.com/intellect-signs-multi-year-deal-with-one-of-the-big-four-in-australia-to-provide-a-digital-solution-for-business-and-retail-banking.html "Intellect signs multi-year deal with one of the “Big Four” in Australia to provide a digital solution for business and retail banking"). However, over recent [days cost](https://www.financedigest.com/when-is-the-cost-of-electricity-the-cheapest-in-a-day.html "When Is The Cost Of Electricity The Cheapest In A Day?") of funds has increased and, like other banks, we have had to reflect that in our mortgage rates,” HSBC said in a statement. The average mortgage rate on new two-year mortgage deals rose on Wednesday to 5.90%, according to [property data provider](https://www.financedigest.com/office-sector-to-provide-the-biggest-property-investment-opportunities.html "Office sector to provide the biggest property investment opportunities") Moneyfacts – the highest since December last year, in the aftermath of the mini-budget. At 6%, homeowners would [face the same financial](https://www.financedigest.com/geo-political-uncertainty-and-evolving-criminal-methods-are-the-biggest-financial-crime-risks-facing-banks-today-new-report-shows.html "Geo-political uncertainty and evolving criminal methods are the biggest financial crime risks facing banks today, new report shows") burden from repayments as they did in the late 1980s, even though mortgage rates were around 13% then, according to housing market analyst Neal Hudson, founder of consultancy Built Place. Hudson’s analysis takes into [account the fact that mortgagors today borrow much greater sums against their income -a ratio that has risen from 2.0 in the late eighties to around 3.5 today – in addition to tax](https://www.financedigest.com/iris-first-to-launch-making-tax-digital-functionality-for-accountants.html "IRIS first to launch Making Tax Digital functionality for accountants") and loan product changes. It takes a far lower mortgage [rate to create the same amount of financial stress in terms of repayments as a double-digit mortgage rate did back](https://www.financedigest.com/decision-to-end-ecb-reinvestments-takes-back-seat-to-rate-hikes-sources-say.html "Decision to end ECB reinvestments takes back seat to rate hikes, sources say") in previous periods,” Hudson said. STRESS The question now is how mortgage [market stress will feedthrough into the real](https://www.financedigest.com/despite-concerns-over-brexit-uk-rated-as-most-attractive-commercial-real-estate-market.html "Despite concerns over Brexit, UK rated as most attractive commercial real estate market") economy. Two-year swap [rates – a key determinant of mortgage borrowing costs – have soared by 95 basis points](https://www.financedigest.com/ecb-goes-big-with-50-basis-point-hike-ending-negative-rates-era.html "ECB goes big with 50 basis-point hike, ending negative rates era") over the last two months. Historically, increases of 85 [basis points](https://www.financedigest.com/traders-ramp-up-bets-on-75-basis-point-ecb-sept-hike-bond-yields-jump.html "Traders ramp up bets on 75 basis-point ECB Sept hike, bond yields jump") or more have presaged large annual declines in housing starts in subsequent quarters – as happened when swap rates spiked in 1989, 1994 and 2008, according to a Reuters analysis. Jamie Lennox, director at broker Dimora Mortgages, said there was “no [end in sight” for the trouble in the mortgage](https://www.financedigest.com/digital-id-revolutionises-end-to-end-mortgage-and-protection-platform.html "Digital ID Revolutionises End-to End Mortgage and Protection Platform") market. “This is not the news the hundreds of thousands of homeowners will want to hear and will send shivers down their spine,” he said. [Financial markets fully price in the BoE’s Bank Rate rising to 5.75% from 4.5% now, within touching distance of the 6% mark used by the BoE last year in its stress testing of major financial institutions](https://www.financedigest.com/how-the-values-that-underpin-financial-institutions-impact-wider-society.html "How the values that underpin financial institutions impact wider society") – a fact not lost on banking executives. A [Reuters poll](https://www.financedigest.com/ecb-to-go-big-again-on-oct-27-with-75-bps-rate-hike-reuters-poll.html "ECB to go big again on Oct. 27 with 75 bps rate hike: Reuters poll") of economists published 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 are repricing mortgage [products as quickly as possible to stay open for business](https://www.financedigest.com/easycat-moves-to-public-beta-changing-the-way-businesses-market-their-products-and-do-business-one-catalog-at-a-time.html "EasyCat moves to public beta – changing the way businesses market their products and do business one catalog at a time"). But product rates have to move in sync with the swap curve, which reflects the [market price](https://www.financedigest.com/west-drayton-proves-popular-alternative-with-those-priced-out-of-london-market.html "West Drayton Proves Popular Alternative With Those Priced Out Of London Market") of the money they then lend out, with a margin laid on top. Borrowers therefore should expect [volatility in mortgage prices](https://www.financedigest.com/italy-cpi-rises-again-in-april-amid-energy-prices-volatility.html "Italy CPI rises again in April amid energy prices volatility") until swap rates start to fall, those bankers say, and there can be no certainty in when that might begin until policymakers achieve greater control over inflation. While that fight rages, lenders also need to ramp up due diligence to ensure borrowers can comfortably afford to [repay loans](https://www.financedigest.com/bounce-back-loans-what-to-do-if-you-cant-repay-2.html "Bounce Back Loans: what to do if you can’t repay?") at more expensive rates, to avoid falling foul of consumer protection regulation and minimise risk of future loan defaults. The BoE stresses that this is not a repeat of the 2007-09 financial crisis, with [banks today far better capitalised -which in theory means](https://www.financedigest.com/alawwal-bank-redefines-what-branch-banking-means-in-the-digital-age.html "Alawwal bank redefines what branch banking means in the digital age") they can keep the supply of credit open through tougher economic conditions. RECESSION? So far, British households have proven surprisingly resilient to sharp hikes in the prices of everyday goods and therapid rise in interest rates that have lifted the cost of [mortgage loans](https://www.financedigest.com/metro-bank-posts-second-quarter-of-profitability-on-mortgage-loans-demand.html "Metro Bank posts second quarter of profitability on mortgage loans demand"), credit cards and other finance. Most bankers attribute this strength to large savings accumulated during pandemic lockdowns but with inflation holding at historically high levels, [Britons are once again using credit to support lifestyle spending](https://www.financedigest.com/six-in-ten-britons-will-spend-less-at-christmas-deloitte-survey.html "Six in ten Britons will spend less at Christmas -Deloitte survey") habits like travel and entertainment. The long and short of it is that a large number of households face a stark increase in their mortgage payments over the course of the year,” Philip Shaw, [chief economist](https://www.financedigest.com/ecb-should-raise-rates-at-steady-pace-chief-economist-says.html "ECB should raise rates at steady pace, chief economist says") at Investec, told Reuters. In aggregate what is expected is a material slowdown in spending, that’s why we’re suggesting why the economy is likely to fall into a [mild recession](https://www.financedigest.com/euro-zone-likely-heading-into-mild-recession-pmi.html "Euro zone likely heading into mild recession-PMI"), largely because of that,” headed. The consensus from the [Reuters poll](https://www.financedigest.com/economic-headwinds-set-to-push-oil-below-100-in-2023-reuters-poll.html "Economic headwinds set to push oil below 0 in 2023: Reuters Poll") published on Wednesday suggested Britain should dodge recession but with weak growth instead. (Additional reporting by Lucy Raitano and Iain Withers; Editing by Kirsten Donovan) --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---