UK mortgage rates triple in 'nasty shock' for homeowners
A HOUSING affordability crisis is brewing in the UK, with more than 1.4 million homeowners forced to refinance their mortgages this year at significantly higher interest rates.
Many will have to slash their spending on other expenses to cover the higher costs, while others may simply find it impossible to make ends meet.
It is expected to peak in the next couple of months, with 371,000 loans coming up for renewal between April and June.
Those mortgages were secured before the Bank of England embarked on its fastest tightening spree in three decades to combat inflation. Most of them currently have rates below 2 per cent, said the Office for National Statistics, and will be renewed at rates that are up to three times higher.
“People nearing the end of their fixed-rate deal are in for a nasty shock,” said Myron Jobson, senior personal finance analyst at UK investment platform Interactive Investor.
Timur Kashaev, 41, saw his monthly mortgage payment jump by £800 (S$1333) in December, when his three-year loan with a 1.8 per cent fixed rate expired and he had to renew at 4.8 per cent.
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The cybersecurity engineer is now paying £2,200 a month for his two-bedroom apartment in Putney, London. He has had to cancel his travel for the year, nixing trips to Israel and Greece. He also cooks at home now instead of ordering out.
“I’m not sure what other financial sacrifices I’ll have to make,” he said.
Most fixed-rate mortgages in the UK are set for two or five years, compared to the typical 30-year loan in the US. That means many mortgages come up for renewal each year, and British homeowners will feel the impact of rising rates faster than their American counterparts.
The average rate for a two-year fixed mortgage is currently 5.35 per cent, while a five-year is slightly cheaper at 4.74 per cent, said UK price comparison site Uswitch. That is down from a peak of 6.65 per cent in October, but still a shock for homeowners who are used to paying significantly less.
Guilaine Le Joncour, 43, is facing an additional £440 in monthly costs after her two-year, 1.8 per cent fixed-rate mortgage comes up for renewal. The fundraising manager and her husband have negotiated a deal for October that will see their rate rise to 3.8 per cent, costing them a total of £2,340 monthly.
The couple would have extended the term of their mortgage, now at 21 years, but can’t because they will not earn enough in retirement to afford the monthly costs.
“If I had a crystal ball, I would have secured that 1.8 per cent interest rate for the next 10 years,” she said.
The higher borrowing costs have hurt demand for new loans, with UK mortgage approvals falling in January to the lowest level since early 2009, not including the UK’s first Covid lockdown when the property market was closed.
That number rebounded slightly in February, but is still well below levels seen during the pandemic.
Meanwhile, house prices are falling at the sharpest pace since 2009 and homes are taking almost twice as long to sell as they did a year ago.
“Mortgage rates are high and house prices are falling, devaluing people’s properties while making it more expensive to keep them,” said Graham Cox, broker at UK-based Self Employed Mortgage Hub.
The International Monetary Fund recently ranked the UK at the bottom of its G20 peers for economic output this year, with high interest rates a key factor hampering the economy.
Still, to this point higher rates have had little impact on the number of mortgages in arrears, which stayed relatively steady between the fourth quarter of 2019 and the end of 2022, showed data from industry group UK Finance.
To avoid falling behind, borrowers are seeking different options to mitigate rising mortgage costs, said Rosita Janulion, mortgage expert at UK brokerage company Habito. She said more people have been inquiring about interest-only deals, variable rates and longer terms.
That’s the case for Bill Carcary.
The 44-year-old is facing the prospect of higher payments for his three-bedroom semi-detached house in Hampshire when his current five-year, 2.05 per cent fixed-interest mortgage deal ends in November.
The self-employed pharmacist is worried he might not get a good rate then, and expects his monthly costs to rise about £200 based on current rates.
One option he’s considering: increasing the term of his mortgage from nine to 12 years to keep the payments where they are.
“I’ve got a 10-week-old baby and expenses going way up because of inflation, so this is causing me quite a bit of stress,” he said. BLOOMBERG
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