BOE says 4 million households face a jump in mortgage costs

THE Bank of England (BOE) warned that some four million households will face a sharp increase in mortgage costs, with the average borrower paying almost £3,000 (S$5,193) more a year.

The assessment in the central bank’s Financial Stability Report underscores the strain from the quickest series of rate rises in three decades. The action is meant to slow the economy and rein in inflation, but will bring real pain for consumers already coping with the tightest squeeze in living standards in generations.

The issue is becoming a key battleground between the UK’s two main political parties ahead the next election, which is widely expected in 2024. Prime Minister Rishi Sunak’s government has been looking for ways to ensure that savers benefit from higher interest rates and give borrowers flexibility in restructuring their finances.

“The full impact of higher interest rates to come through both in the UK and in other advanced economies,” BOE governor Andrew Bailey said on Wednesday (Jul 12) at a press conference in London. “Elements of the global financial system do remain vulnerable to interest rates.”

Bailey said that for now, both borrowers and lenders are in better condition to shoulder difficulty than they were in previous rate cycles.

“Compared with previous periods of high interest rates, households and businesses are less likely to cut back on spending and default on loans,” he said. 

Politicians grilled bank bosses on the state of the mortgage market on Tuesday, demanding answers on what lenders are doing to support customers. 

The BOE said that a typical household rolling off a fixed-rate deal in the second half of 2023 faces a £220-per-month increase in its mortgage costs based on current rates – equivalent to £2,640 a year.

By the end of 2026, about one million households will have seen their payments go up by more than £500 a month. This assumes that they refinance at the same maturity, but about 15 per cent of mortgagees have extended the length of their loans. Some are repaying using their savings, which reduces the quantity of mortgages they are refinancing.

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The warning comes after Moneyfacts revealed that the average rate for fixed two-year home loans rose to 6.66 per cent, the highest since August 2008. The pain for homeowners could get even worse as the BOE is forced to ramp up interest rates to stamp out inflation that has proven surprisingly sticky. Currently markets are pricing in a peak Bank rate of almost 6.5 per cent.

The BOE also warned that an exodus of buy-to-let landlords facing higher mortgage costs threatens to hit house prices as many consider selling their properties. 

“Falling profitability could, in principle, cause landlords to sell their property investments and exit the buy-to-let market,” the Financial Stability Report said. “If this were to happen in large enough volumes, it could put downward pressure on house prices.”

Some landlords are more vulnerable after taking out interest-only mortgage deals, and many are hiking rents to cover their higher costs. 

The BOE said that landlords – who are set to face a £275 per month hike in monthly repayments on average – will likely put up rents to offset the blow. UK private rents already rose 5 per cent in the year to May, the largest increase since records began in 2016. 

The impact of the higher mortgage costs has been delayed by a huge shift in the UK from variable rate mortgages to fixed-rate deals typically lasting two or five years. While mortgage arrears remain low by historical standards, the BOE’s Financial Policy Committee said they are increasing, and that it will “take time for the full impact of higher interest rates to come through”. 

It said that mortgage defaults will be limited by a resilient banking sector and stricter regulatory standards.

Steven Major, HSBC’s global head of fixed income research, told Bloomberg TV that the BOE has a “thankless task” as it tries to bring down inflation while contending with the lagged impact of mortgage rates.

“Everyone recognises there’s a lag effect and this is one of them – we know the numbers of how many people have fixed-rate mortgages, but we don’t know how exactly they will behave when they get the shock,” he said.

The amount all UK households will have to pay out on mortgage costs will climb to 8 per cent of their post-tax income by 2026, up from 6.2 per cent. However, it is still below the peak seen in the global financial crisis and the early 1990s recession.

Despite the surge in the cost of a two-year mortgage, Andrew Asaam, mortgage director for Lloyds Banking Group, said that “the split between two- and five-year fixed has moved more towards the two-year”, suggesting borrowers are banking on interest rates eventually coming down.

The BOE said that around half of mortgage holders – around 4.5 million – have already rolled onto new deals since the start of its hiking cycle in December 2021. 

Nationwide Building Society said house prices slipped 3.5 per cent in June compared with a year earlier, but economists expect the downturn to worsen after the recent surge in mortgage rates. 

Niraj Shah, economist at Bloomberg Economics, warned on Wednesday that “Britain’s housing market correction has further to run.”

“Our view is that the fastest pace of policy tightening since the 1980s, permanently higher mortgage rates and stalling real incomes mean the slow grind lower in property prices is likely to persist,” he said. BLOOMBERG