UK Mortgage Market unstable

The mortgage market in Britain, valued at £1.5 trillion ($1.9 trillion), is experiencing turmoil due to disruptions in money markets. This instability threatens to trigger a decline in housing activity, reminiscent of the late 1980s, and cause financial difficulties for homeowners. Lenders have been rapidly adjusting and withdrawing mortgage offerings to keep up with rising funding costs driven by expectations of interest rate hikes by the Bank of England, aimed at combating persistent high inflation.

The anxiety surrounding the instability in mortgage rates and availability is causing concern among prospective home buyers, sellers, and existing mortgage holders. Homeowners whose fixed-term deals are expiring face substantial increases in repayments. The repercussions of this uncertainty could have long-lasting effects on the market.

The housing market holds significant importance in the consumption-driven British economy and is closely tied to consumer confidence. Investors are closely monitoring the impact on housing market activity, which had rebounded earlier in 2023 after a period of turmoil triggered by former Prime Minister Liz Truss’s economic agenda.

HSBC, the latest major lender to make changes to its mortgage offerings, announced higher rates taking effect soon. The average mortgage rate for new two-year deals rose to 5.90%, the highest since December of the previous year. Homeowners could face a similar financial burden as in the late 1980s, even though mortgage rates were much higher then. This is due to the fact that today’s borrowers borrow larger sums against their income, with a ratio that has increased over time.

The increase in mortgage borrowing costs, as reflected by two-year swap rates, has historically preceded declines in housing starts. Experts are uncertain about how the stress in the mortgage market will impact the broader economy. The Bank of England is expected to raise its Bank Rate, and financial markets are pricing it in, creating additional concerns for homeowners. Lenders are repricing mortgage products to navigate the turbulent market, but borrowers should expect volatility until swap rates start to decline. Lenders also need to ensure borrowers can comfortably afford repayments at higher rates and minimize the risk of loan defaults. While banks are better capitalized than during the financial crisis, economists predict a slowdown in spending, potentially leading to a mild recession.