Mortgage deals are being made by banks and building societies after the fall in the pound fueled expectations of an emergency rate hike. Whether you’re buying for the first time or looking to get a mortgage, what does the turmoil in the mortgage market mean for you?
What happened?
Hundreds of mortgage deals have been pulled from banks and building societies as they digest the impact of last week’s mini-budget that changed the outlook for interest rates.
The country’s largest mortgage lender, Halifax, for example, has withdrawn its fee-based mortgage products, where borrowers paid an upfront fee to lock in a lower fixed rate.
Halifax is not alone. According to data firm Moneyfacts, 3,596 home mortgage deals were available as of Tuesday morning, down 284 from before the pound’s sharp fall on Monday morning. At the end of last year there were 5,315 products.
“The future certainly looks bleak with the UK’s largest lender offering a wide range of its products,” says Jamie Lennox, Director at Dimora Mortgages. “Uncertainty about the risk of an emergency rate hike will likely cause other lenders to pull back products or raise rates dramatically until they know what the implications are.”
Why do lenders make deals?
In short, the interest rate outlook has changed and lenders need to ensure their mortgage products are profitable and affordable for customers. Experts said a rise in the cost of long-term borrowing due to the recent upheaval means the cost of offering new business has risen.
Lenders are pricing their mortgage rates against the Bank of England’s base rate, which rose to 2.25% last week. Until recently, the financial markets thought that the key interest rate would rise to 4.5% by next spring.
However, the reaction to the government’s tax cut budget means analysts believe it needs to hit close to 6% to restore investor confidence in the UK economy and bring inflation under control.
“Major mortgage lenders are hauling in sails after the tide has turned,” said Sarah Coles, senior personal finance analyst at Hargreaves Lansdown. “The dramatic overnight rise in market expectations for future interest rates has pushed up the cost of doing business and lenders are pausing to reassess and reassess.”
What does this mean for my mortgage?
It depends what kind of deal it is. Most borrowers have fixed-rate mortgages and are therefore isolated from the upheavals for the time being. However, the result of all this is less choice and higher borrowing costs when you need to find a new business.
Someone who fixed at 2% two years ago might be considering a 5% rescheduling rate by next week. If they had a £200,000 mortgage over 25 years, that would mean a rise in monthly payments from £848 to £1,169 – or £321.
About a fifth of households have a variable rate — either a tracker mortgage, where the rate you pay is explicitly tied to the bank’s base rate, or their lender’s standard variable rate (SVR). Amid announcements that products would be withdrawn, Halifax and Scottish Widows Bank said their SVR would rise 0.5% to 5.74%.
Higher mortgage costs are also bad news for first-time buyers, who may have to cut their budget to meet loan repayments.
If you have six months or less with a fixed-rate mortgage, it may be wise to start looking for a new interest rate. With market turmoil, you may want to speak to a broker who understands the rapidly changing outlook for the mortgage sector and can spot the best rates.
Imran Hussain, a director at Harmony Financial Services, predicted that mortgage products “will be hacked and changed faster than we can all keep up.” “The mortgage market was already hectic and now it’s going haywire,” he said.
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