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19 June 2023

The UK’s mortgage time bomb is now ticking louder than ever 

By the next election, housing will represent either a higher long-term cost or a damaged investment for almost everyone in the UK.

By Will Dunn

More than 100,000 households a month are facing a dramatic increase in mortgage payments as rates continue to rise. The average rate on a two-year fixed rate mortgage is now over 6 per cent, according to Moneyfacts. At the same time, the value of the houses on which these payments are being made is falling: last month’s Nationwide house price index found that the average UK house price had its biggest year-on-year fall since May 2009, falling 3.4 per cent in the 12 months to May. 

Perhaps that sounds less concerning than the 6.2 per cent fall recorded during the financial crisis – but it’s important to remember that these are nominal prices. In 2009, the prices of many other things were falling (average inflation for the year was negative), but this year they’re rising fast – which means the real price of a house, measured against everything else, is actually falling much more steeply.

Nationwide’s chief economist said the “headwinds” facing the market will “strengthen in the near term”; the UK’s failure to fight inflation is increasing pressure on the nation’s mortgages.

As Rishi Sunak took to the stage at an awards ceremony last November, he jokingly thanked friends, family “and of course, the UK bond markets” for helping him become Prime Minister. The audience laughed because it was true: the attempt made by his predecessor, Liz Truss, to make radical changes to the UK economy had been rejected by the investors in our government debt. Gilt yields (the price of servicing that debt) had risen sharply. Truss was finished when mortgages – which become more expensive as gilt yields rise – were withdrawn or repriced at a rate that terrified the Conservative Party and its voters.

In the months that followed, Sunak and his Chancellor, Jeremy Hunt, have been careful to portray themselves as technocrats in whom the markets can have confidence. But they haven’t delivered the results investors need: “core” inflation (a measure that removes volatile prices such as energy and food, and is seen as “real” inflation) rose in May. The only countries with higher rises in core inflation were Argentina and South Sudan. In expectation of higher interest rates from the Bank of England, investors sold off gilts once more, and mortgage rates have also risen again. Almost 800 mortgage products have been withdrawn from the market in the past week.

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[See also: How Help to Buy broke the housing market]

The repricing of the UK’s mortgage market was already a challenge for many households; roughly 1.5 million will have to refinance this year, at a higher rate of interest. Most at risk are those first-time buyers who were convinced to take on a fixed-rate mortgage in 2020 or 2021, when the then-chancellor (one Rishi Sunak) changed the rules of stamp duty to encourage new buyers and to prop up the housing market. As their two or five years of fixed-rate payments come to an end, these homeowners will face significant rises in their monthly payments.

In September 2021 the average rate for a two-year fix was 1.2 per cent, and at that rate a first-time buyer with a 5 per cent deposit would have paid £879 per month for an average-priced property in England. Remortgaging at the new average of 5.74 per cent for a two-year deal will now cost that buyer £1,431 – a rise of £6,624 per year. A 4.5 percentage point rise in mortgage rates since September 2021 has become a 63 per cent rise in payments. Sunak and Hunt have not saved homeowners from what Labour is calling the “Tory mortgage penalty”.

Fortunately, most people have a “buffer” in their finances. A bank’s mortgage affordability check is designed to find out not just how much a buyer can afford to borrow, but how much of a rise in borrowing costs they could sustain. Until last year the Bank of England stipulated that a borrower should be “stress tested” to ensure a buyer could afford the higher variable rate after the end of their fix, plus 3 per cent – so most people remortgaging should still be within their buffer.

That buffer is much smaller than it was, however. The trade association UK Finance has told me that the “rate shock” of 12 hikes in a row by the Bank of England, plus the impact of inflation on household finances, has roughly halved the amount of further cost increases that the average household (with an average-sized mortgage) can afford.

Watch: Will Dunn interviews professor Danny Dorling on the mortgage crisis

The impact of inflation varies from person to person, however, and for some households it will be too much: by the next election UK Finance expects the number of households in mortgage arrears to rise by more than 110,000 for the first time in a decade. Two scenarios could make this worse: a recession that causes a significant rise in unemployment (usually the main driver of mortgage arrears) or a cold winter in which the government doesn’t take sufficient steps to reduce energy bills.

But even if these shocks don’t materialise, the prospect of higher rates over an extended period will mean fewer entrants to the housing market and less activity within it, which will depress prices – so even the quiet majority of (mostly older) homeowners who don’t have a mortgage will feel the dwindling value of their biggest asset. And as buy-to-let mortgages make being a landlord less profitable, renters may also feel the squeeze. By the next election, housing will represent either a higher long-term cost or a damaged investment for almost everyone in the UK, and the idea that Liz Truss is to blame will be even more implausible than it is now. “Tory mortgage penalty” may well turn out to be Labour’s most effective line.  

This article was originally published on 1 June 2023 and has been updated with the latest information.

[See also: Why has the UK so far avoided recession?]

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