Thousands of Londoners have been warned they face a major mortgage “shock” with some paying an extra £10,000 a year as the Bank of England raises interest rates to tackle soaring inflation and restore confidence in Britain’s economy.
The warning came as Prime Minister Liz Truss and Chancellor Kwasi Kwarteng held emergency talks with independent fiscal watchdog, the Office for Budget Responsibility, in a bid to calm financial markets following last week’s mini-budget.
Mr Kwarteng’s plan to slash taxes by £45 billion and spend a further £60 billion on freezing energy bills led to a surge in the cost of government borrowing, forcing the central bank to prop up pension funds and triggering fears that interest rates could rise higher and faster than expected.
Amid the volatility, more than 40 per cent of new mortgage products have been withdrawn from the market this week, according to financial website Moneyfacts. As lenders race to re-price deals, housing market experts predict the Bank of England’s Monetary Policy Committee could raise rates to six per cent by next spring — pushing borrowing rates to levels not seen for more than two decades.
Many homeowners who locked into fixed-term deals of just over one per cent now face a massive rise in their monthly payments as those arrangements expire. Of the 2.1 million mortgage holders in London and the South-East, around 27 per cent — more than one in four — are estimated to have fixed-rate mortgages which will expire in 24 months or less.
New data compiled by mortgage broking firm L&C suggests that if mortgage rates jump from 1,5 per cent to five per cent, then an average London homeowner with a £350,000 mortgage could be facing a rise in payments of £647 a month — or £7,764 a year. At six per cent the jump is £856 per month — or £10,272 a year. David Hollingworth, from L&C, said: “Many borrowers will currently be protected from the rises as the vast majority have elected to fix their rate in recent years.
“However, those borrowers could face a substantial increase in their interest rate when that deal comes to an end resulting in a potential payment shock at a time when other costs are also climbing.” Mortgage market experts said they were already seeing average tracker and fixed rates increase to four per cent, after the Bank increased the base rate by 0.5 percentage points to 2.25 per cent last Thursday.
But the Bank’s chief economist, Huw Pill, has signalled that it is prepared to launch a “significant monetary policy response” to protect sterling after the pound plummeted to an all-time low of $1.03 on Monday. On Friday, the pound bounced back against the dollar on news of the Prime Minister’s meeting with the OBR, rising to $1.12 in early trading this morning.
Although interest rates on government borrowing — a crucial benchmark for mortgage lenders — have also fallen since the central bank launched a £60 billion bond-buying programme to restore financial stability, gilts are still around a percentage point higher now than they were at the end of August.
Lucian Cook, head of residential research for estate agents Savills, said: “Until we have a clearer picture of how the Bank of England and lenders will react to recent events, it is difficult to predict precisely what the future holds for the mainstream housing market.
“As a minimum that indicates a hiatus in the market over the immediate term. A lot depends on the impact on the cost and availability of mortgage debt over the medium term and the extent to which policymakers and lenders seek to mitigate the potential impact of a sharp increase in interest rates.”
Ray Boulger, from mortgage brokers John Charcol, said many lenders will have stress-tested borrowers to see if their household budgets could cope with interest rates of seven per cent.
But banks and building societies may not have taken into account the cost-of-living crisis which has seen energy, fuel and food prices surge this year. He added that he was expecting to see a 10 per cent fall in property prices as interest rates dampen demand.
With Labour opening up a 33 point lead over the Tories, according to a YouGov poll, concerns over Ms Truss’s tax-cutting plans and failure to set out how they will be paid for are set to hang over the Conservatives’ annual conference starting this weekend in Birmingham. On Friday, the Liberal Democrats called for the Government to hold an emergency summit with lenders and reiterated its plea for an emergency support package for struggling home-owners.
Treasury minister Andrew Griffith told the BBC that rising interest rates were not a problem exclusive to the UK: “We understand the aspiration to buy your own home and we understand the concerns of every household in this country. It’s important that we understand the context that we’re working through to try to help people. But that is a largely global phenomenon.”
