Ex-Chancellor Kwasi Kwarteng’s mini budget was designed to put the UK on the road to growth. What it actually achieved was to panic the markets, cause the pound to collapse and put bonds into free fall.
But the real problem was closer to home.
Bonds – specifically government bonds, or Gilts – are the financial foundation that mortgage lenders rely on. To protect itself from the collapse in their prices, the mortgage industry reacted by withdrawing around 60% of the mortgage deals from the market. Panic might not be too strong a word.
Mortgage rates, which had already been heading up, looked set to go through the ceiling for those deals that remained.
Chancellor Jeremy Hunt’s U-turn on the mini budget may have been a lifeline. His reversal of almost all the tax cuts strengthened the pound and stabilised the bond market.
The worst of the panic may be over, and we may have moved back from the brink. But we are not looking at a return to low rates, or even to complete stability just yet.
What will happen to mortgage rates now?
In the wake of the mini budget, investors had priced in a 5.75% peak in the Bank Rate by May 2023, up from yesterday’s new rate of 3%. After Chancellor Hunt’s announcement, this expectation had fallen to between 5% and 5.25%.
The Bank of England had hinted to people worried about mortgage payments that rates may not go up as much as previously feared. The Bank’s deputy governor of monetary policy, Ben Broadbent, publicly questioned whether dramatic hikes are necessary amid signs that global prices are stabilising. However, the BOE has increased the base rate yesterday by 0.75% to 3%, its highest rate rise since 1989.
Mortgage lenders are returning to the market. But they are still launching and pulling deals quickly, and fixed-term rates could continue to rise in the short-term. It may be a while before mortgage rates ease.
But what will this mean for house prices – and for anyone who wants or needs to make a move?
The outlook for house prices
If the Bank of England rate settles at around 5%, it will be close to the historic average, and potentially sustainable for the long term – particularly if it has the desired effect of getting inflation back under control.
But at that level many people who have bought their home during the last 14 years of low rates may be facing challenges. When they reach the end of their current fixed price period in the next few months or years, they could be facing a huge increase in costs.
This could present a major problem for those who overstretched their finances to secure the home of their dreams. The home they bought in the last few years could become impossible to afford now.
For investors who have taken advantage of low rates to build a buy to let portfolio the position could be even more challenging, because it will be multiplied by every home they own.
When homes become impossible to finance, they need to be sold. As property is a specialist sector it can be volatile in adverse market conditions, there could be delays in realising the investment. A sudden glut on the market of individual homes and investment portfolios could drive prices down, especially if buyers have difficulty raising the necessary funds.
But on the positive side, mortgage lending has been much more tightly regulated, and finances have been stress tested. There should be some room for people to tighten their belts and make increased repayments.
We may not see a crash – although the days of house price inflation are probably over.
Do you need help with your own mortgage panic?
So – the market panic may be over, but it you are worried about your own mortgage you should get some expert help without delay. There may be solutions – from extending your repayment period to reducing your Loan to Value ratio – which could help us find you an affordable mortgage solution.
To find out more, call us at Continuum today.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable mortgage products you should seek independent financial advice before embarking on any course of action.
Your home or property may be repossessed if you do not keep up repayments on your mortgage.
The value of property investments and income from them can go down as well as up and investors may not get back the amount originally invested.