Where this UK mortgage crisis is really going to bite

Where this UK mortgage crisis is really going to bite
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Typical. They deal with a cost of living shock and another shows up to take his place.

The gilt market’s extreme reaction to UK Chancellor Kwasi Kwarteng’s ‘tax event’ last week, which came on the back of a package to tackle rising energy costs, has wreaked havoc in the mortgage market. A group of lenders including Virgin Money, Skipton Building Society and Halifax on Monday stopped offering new mortgages or pulled certain products in response to rising financing costs.

It’s not 2008. The market isn’t simply collapsing because lenders run out of funds. But the effects will be painful and felt unevenly.

Banks have been caught with offers that are just a bad deal after the cost of financing has risen. The two-year swap rate, at which mortgages are discounted, has risen to over 5.5 percent from under 4 percent a few weeks ago. Deals that looked decent just a short time ago are now uneconomical, especially for those with the sharpest prices on the market.

The shock hit some banks harder than others. The largest lenders have likely secured their funding several weeks in advance. HSBC and Santander suspended new business on Tuesday, partly because they were swamped by demand. Halifax only drew certain fee-paying mortgages, where the upfront payment must offset a lower interest rate. Others, mostly Challenger banks and building societies, froze everything.

Make no mistake: all banks will be raising their mortgage rates in the coming weeks. But for some, the urgency is greater. Big high-street names like Barclays or NatWest have stickier, lower-cost deposits in their funding mix. Challengers and building societies tend to be more reliant on more expensive savings and hot money that moves more frequently.

That’s gotten more expensive: According to Credit Suisse’s Omar Keenan, the average rate on offer for two-year bonds on Monday was 2.8 percent from building societies and 3.2 percent from Challenger banks. At the big banks it was only 1.6 percent. Similarly, the Big Five banks have loan-to-deposit ratios of about 80 percent, Keenan notes. Other specialist lenders are more dependent on other sources of funding, such as the mortgage-backed securities market.

The impact on households will not be immediate. UK borrowers now mostly have fixed rate contracts of between two and five years. According to UK Finance, 600,000 fixed rate contracts will expire in the second half of this year and 1.8 million next year. If mortgage rates rise to 6 per cent, the average household refinancing a two-year contract would see their monthly repayments rise by over 70 per cent, from £863 to £1,490, according to Pantheon Macroeconomics.

More households than ever have been spared from this market shock. Since 1990, the proportion of homeowners has increased steadily, with the number of homeowners without a mortgage exceeding the number of borrowers since around 2014. However, those protected from mortgage rates are concentrated in the older age group: 62 percent of homeowners (about a third of homeowners). market) are 65 years or older; 58 percent of homeowners with a mortgage (another third) are between 35 and 54 years old. Private tenants could suffer as landlords attempt to pass on higher mortgage costs.

Younger people, many of whom are already barred from buying, are likely to find it increasingly difficult to obtain a mortgage for reasons of affordability. First-time buyers, who picked up an average income ratio of 3.58 times over the past year based on UK financials, are likely to be hit hardest by higher interest rates and tighter lending criteria, followed by movers at 2.96 times and those undergoing debt restructuring of 2.8 times.

And as with energy, poorer households will suffer the most. UK Finance earlier this month looked at households’ “headroom”, or the proportion of disposable income left after mortgage repayments and basic spending. A 100 basis point hike in mortgage rates (and the market is pricing in almost triple that by the end of the year) did little to change the picture for the richest households, but it did mean a significant deterioration in the position of those in the lowest income brackets. Even for this modest rise in interest rates, the trade association estimated that three in 10 companies could struggle to pay their bills after refinancing this year.

Needless to say, these are also among the households least likely to benefit from the tax cuts that helped start this mess.

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