Some of the UK’s largest mortgage lenders, including Virgin Money and Skipton Building Society, have stopped offering new home loans in response to market volatility triggered by the government’s mini-budget.
Halifax, part of Lloyds Banking Group, the UK’s largest mortgage lender, is also withdrawing a number of new home loans, brokers have been told.
The pause in new lending comes after UK bond yields rose sharply following tax cuts announced by Chancellor Kwasi Kwarteng on Friday.
“This is the first time since the global financial crisis that we are seeing a major pullback in products and a repricing in the mainstream market,” said Ray Boulger, an analyst at mortgage brokerage John Charcol.
“The huge rise in gilt yields means lenders are having to re-rate mortgages very significantly. I expect very few mortgage offers with interest rates below 5 percent will be available until next week. Any lender that hasn’t already pulled out will almost certainly do so on Tuesday.”
He said other lenders have withdrawn new mortgage products including Nottingham Building Society, Bank of Ireland, Leeds Building Society and Paragon Bank.
Paragon Chief Executive Nigel Terrington told the FT, “We drew our new fixed income deals today because they are all being rated by the swap markets and have risen dramatically in the last 48 hours.”
Virgin Money is expected to return to the market later in the week once markets stabilize, according to a person close to the situation.
Halifax said it would withdraw its offering of mortgage products with fees, which have cheaper interest rates, starting Wednesday. While the lender said the measure was temporary, there was no timeline as to when it would be reversed.
Lenders use swap rates to mitigate interest rate risk on fixed rate home loans. “Swap rates are being dictated by gilt yields, which have just skyrocketed,” Boulger said. “So the cost to lenders just went up.”
Real estate economists have sounded the alarm that rising interest rates and turbulence in the mortgage market could trigger a home price correction more severe than that seen after the financial crisis.
Andrew Wishart, senior economist Capital Economics, said the housing market is in uncharted territory following Kwarteng’s announcement.
Prior to the Chancellor’s statement, the consultancy expected the Bank of England’s base rate to rise from 2.25 per cent to 4 per cent, with mortgage rates down 5 per cent – a level they are already fast approaching.
In this scenario, Capital Economics predicts a fall in house prices close to the level of the financial crisis. But if the policy rate hikes higher, prices could fall further, Wishart said.
“Right now we have [forecast] a correction of 20 percent in real terms and 7 percent in nominal terms, which is roughly in line with the level of the financial crisis. . . At the current level of house prices, the mortgage interest rate is 6.6 percent [would] cause affordability to deteriorate to levels not seen since 1990, representing a correction of nearly 35 percent in real terms and 20 percent in cash terms.”
A stamp duty cut, also announced in the budget, could mitigate some of the price declines but is unlikely to have a major impact, Wishart added.
“It could stop the decline in London for a couple of months, but that’s where prices are already most stretched,” he said.
While 6 percent interest rates are historically low, at less than half their peak in the late 1980s, high home prices mean affordability is in overdrive and many homeowners would have little leeway if forced to refinance.
“It’s about affordability. People borrow such large sums that 6 percent [mortgage rates] will make it difficult for everyone. People will have less money to spend, so prices will go down,” said Henry Pryor, an independent real estate agent.
“As of Friday, 30 percent of the deals I’m involved in are being restructured because someone flinches: they can’t borrow what they wanted to borrow or it’s going to cost them more.”
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