The looming mortgage crisis explained in simple terms
Millions of UK homeowners are facing steep increases in their mortgage payments as the Bank of England (BoE) prepares to hike interest rates in a bid to curb spiralling inflation and stem economic turmoil.
Experts have sounded the alarm over a housing market crash amid fears unaffordable payments will cause a mass sell-off.
The looming UK mortgage crisis explained in nine points
Why are mortgages getting more expensive? The BoE is expected to aggressively increase interest rates in November in an attempt to control rampant inflation and calm the market chaos that has followed Chancellor Kwasi Kwarteng’s mini budget.
How high will interest rates go? The base rate could climb as high as 6% in the first half of next year. Forecasts have soared since Kwarteng revealed the government’s plan to slash taxes, causing sterling to collapse and the price of government borrowing to soar.
The impact is already being felt. Lenders have suspended mortgage products en masse as they scramble to reprice them amid uncertainty over how much rates will change. More than 40% of available mortgages were withdrawn in the week following the mini budget.
Available rates for new deals are soaring. According to Moneyfacts, the average rate for a two-year fixed rate mortgage hit 5.17% on Friday, compared to 2.57% in March 2021.The average rate for a five-year fixed rate mortgage was 5.1% compared to 2.75% in March 2021.
How many people will be affected? Some 600,000 people are currently on fixed-rate deals ending this year, and a further 1.8m people are on fixed-rate deals ending at some point next year. This means millions will likely need to remortgage at a significantly higher rate than they are currently on by the end of 2023.
Some borrowers will see their monthly payments rise to unaffordable levels. A person with a £100,000 25-year mortgage at a rate of 2% would pay £424 per month. If the rate rose to 6% they would need to pay £644 a month.
What does this mean for house prices? Mortgage rates are rising at a time of soaring inflation, and many homeowners will be unable to afford their new monthly rates. This could force vast numbers to sell their homes, which in turn would drive down prices.
It isn’t clear how much prices could fall. Some analysts believe they could tumble by as much as 20%. The BoE is preparing for a worst-case scenario of prices dropping by a third. Prices stagnated in September seeing no growth for the first time in more than a year.
How serious is this? Housing market analyst Neal Hudson described the outlook as “terrifying”. He said: “The events of the last week have accelerated the market towards what was its worst case scenario and the opportunities to avoid it are reducing.”
