The biggest mortgage crisis in more than 30 years will hit London hardest, bringing financial misery to thousands of homeowners in the capital, the Standard can reveal.
The huge home loans taken out by buyers to get a toehold on the property market mean they now face crippling rises in their monthly bills as fixed-rate interest deals on offer when rates were at all-time lows expire and have to be replaced.
One housing expert said homeowners faced “a big shock” that will have huge implications for the property market. The warning came as:
* New analysis showed London homeowners face annual mortgage payments sky-rocketing by as much as £8,000.
* Latest figures on Thursday show average two-year fixed rates continuing their remorseless march towards six per cent.
* The City was braced for the 13th interest rate rise on the trot from the Bank of England when its Monetary Policy Committee (MPC) meets next week.
* The crisis has been largely caused by the worse than expected “stickiness” of inflation which has forced the Bank to hike rates far higher than predicted to bring price rises back under control.
In April the Consumer Prices Index fell to 8.7 per cent compared with forecasts of 8.2 per cent but ominously, so called “core inflation”, which strips out food and energy, rose to 6.8 per cent, behind only Argentina and South Sudan. That spooked City markets, which now expect the Bank of England to increase its rate to 4.75 per cent next week. City markets are forecasting that rates will peak at 5.75 per cent by the end of the year, then remain at 5.5 per cent or higher until at least the autumn of 2024.
Analysis by the House of Commons Library for the Liberal Democrats showed that cash-strapped families will be forced to pay out thousands more yearly on their home loans if the Bank’s rate increases to 5.5 per cent. The extra payments will inflict even further economic pain on many households already struggling to make ends meet in the relentless cost-of-living crisis gripping Britain.
Rates on fixed mortgages have jumped and hundreds of deals have been withdrawn from the market over the past three weeks in the worst bout of turmoil since the chaotic aftermath of Kwasi Kwarteng’s mini-budget last September. Yields on gilts — government bonds used to price mortgage deals — have this week spiked to levels not seen since the autumn, with yields on two-year gilts even higher.
This has led to mortgage lenders withdrawing their deals and replacing them with high-priced offers at short notice, often resulting in agreed offers to borrowers being snatched away before the paperwork can be completed.
One of the biggest lenders, HSBC, on Wednesday withdrew its mortgage range for a third time in a fortnight. Other major lenders including Halifax, Nationwide, Santander and Coventry have also pushed through big hikes in their fixed mortgage rates. Brokers say they has been overwhelmed with demand from panicked first-time buyers or existing homeowners needing to remortgage and secure deals before rates rise even further.
On Thursday the average rate on a two-year fix rose yet again from 5.90 per cent to 5.92 per cent, while the average five-year fixed rate increased from 5.54 per cent to 5.56 per cent.
However many London homeowners are still on very low mortgage rates at, or even below, two per cent which were taken out when interest rates were at emergency lows to stimulate the economy. A bulge of two-year deals signed at around the time that Rishi Sunak’s pandemic-era stamp duty holiday ended on June 30, 2021, means thousands are due to expire over the coming weeks.
The Commons Library calculations show that a household with a £150,000 home loan with 15 years to run would see monthly payments rise by £260 if the mortgage rate rose from two per cent to 5.5 per cent — or £3,120 a year.
But for a family with a £350,000 home loan with 25 years to run, monthly payments could spiral by £666, under such a mortgage rate increase — or £7,992.
Tens, if not hundreds of thousands of families in London and its commuter belt are expected to be facing such astronomical increases. There are now growing fears that homeowners could be forced into debt arrears and possibly even face having their homes repossessed if they can no longer afford to meet the payments. Figures this month from industry body UK Finance showed there were 1,250 repossessions in the first three months of the year, up 27 per cent on the same period in 2022.
Liberal Democrat Treasury spokeswoman Sarah Olney, MP for Richmond Park, said: “This Government and Tory economic incompetence means Londoners and people across the South-East are facing a mortgage bills hammer blow.
“Ordinary households are already facing rampant inflation and soaring food bills, and yet ministers are refusing to acknowledge the scale of the crisis.”
Paula Higgins, head of the campaign group HomeOwners Alliance, said: “It’s going to be big a big shock for struggling households who have been given a false sense of hope that we have recovered from the fallout from the mini-budget. There is some comfort in that homeowners have already been preparing for higher interest rates and we must remember that only half of our homes have a mortgage — and the other half are mortgage free. For those households who need to remortgage our advice is to engage with a mortgage broker early. They are worth their weight in gold.”
Experts said the while rates were still lower than they were in the last big mortgage crisis in the early Nineties, far higher house prices mean the impact on personal finances is just as bad.
Aneisha Beveridge, head of research at Hamptons, said that if mortgage rates hit six per cent the proportion of people’s income being spent on their mortgages will return to levels not seen since the late Eighties. It would mean 56 per cent of owners’ incomes will go on their repayments — up from 49 per cent earlier this year. In November 2007 this ratio peaked at 49 per cent, which means the proportional cost of mortgages above levels seen during the last financial crash. The ratio peaked at an all-time high of 60 per cent in November 1989.
