Mortgages in the UK look set to get a lot more expensive

Published Wed, May 24, 2023 · 09:36 PM

THE bad news for UK mortgage holders keeps on coming.

An unexpectedly high inflation reading on Wednesday (May 24) led money markets to wager that Bank of England (BOE) interest rates will peak as high as 5.5 per cent. That is a full percentage point higher than the current benchmark, which may lead to further upward pressure on mortgage rates in the coming months.

While UK inflation fell back to a single-digit rate in April, it is still outpacing wage growth. That cost-of-living crisis is making it even harder for potential purchasers to meet the higher monthly costs required to pay for a property, contributing to net mortgage lending falling to virtually zero in March, according to BOE data.

More than a million homeowners will see their mortgage come due for refinancing this year. Those who have not yet secured a new deal now face even higher payments.

Swap rates, effectively the cost of borrowing from other banks to fund mortgages, had already risen by almost a percentage point in the past month even before this week’s inflation data. The BOE raised its key rate by 25 basis points to 4.5 per cent in early May, and said more tightening may be needed.

“The further rise in swap rates today will hit affordability and demand,” said Niraj Shah, an economist at Bloomberg Economics. “We maintain our view that house prices will drop by about 10 per cent from last year’s peak, with prices resuming a steeper decline later in 2023.” BLOOMBERG