Growing Concerns Over Soaring Mortgage Costs
The soaring mortgage costs in Britain are causing concerns among various stakeholders, including homeowners, investors, charities, and policymakers. While lenders have expressed confidence in borrowers' ability to cope, the recent unexpected 50 basis point rise in the Bank of England base rate to 5% is likely to test that confidence. The already high prices for essential goods and services, combined with the rise in mortgage rates, has created a challenging situation for consumers.
The increase in mortgage rates can be attributed to two main factors: variable rate mortgages that track the Bank of England base rate and fixed rate mortgages that rely on market expectations of future interest rates. The recent data showing higher-than-expected UK inflation has led to expectations of prolonged higher rates, which has been reflected in interest rate swap markets.
While banks claim that only a small number of customers are currently facing financial strain or falling behind on mortgage repayments, lower-income households have been particularly impacted by high inflation. The majority of borrowers are still employed, which has helped them meet their mortgage obligations despite squeezed incomes. However, any significant rise in unemployment could significantly change the situation.
Selling concerns for borrowers with fixed-rate or tracker mortgage expirations.
In the coming months, a substantial number of fixed-rate mortgage deals are set to expire, affecting a significant portion of homeowners. Polling data from debt charity StepChange indicates that 45% of mortgage borrowers, equivalent to 6.9 million UK adults, have experienced difficulties in keeping up with bills and credit commitments. There are indications that cash-strapped individuals are resorting to higher-cost unsecured credit to make ends meet.
While repossession rates have increased compared to the previous quarter, they remain relatively low. Banks argue that mass repossessions are unlikely due to stricter affordability tests, forbearance options, and changes in banking practices following the global financial crisis. Major banks have already implemented measures to support customers, such as financial health checks, temporary payment holidays, and alternative repayment plans.
The government is expected to engage with banks to discuss how they can assist homeowners facing challenges. The finance minister has emphasized that the government will not provide significant financial aid, urging mortgage lenders to fulfill their commitments in helping borrowers cope. Critics argue that banks could do more, especially considering the slower pass-through of rate rises to savers compared to mortgage rate increases. Conversely, the opposition Labour party has proposed measures to curb mortgage costs, including extending mortgage periods. Longer fixed terms have also been suggested, although they come with the risk of locking customers into unfavorable deals. Another potential solution is the reintroduction of a "Help to Buy" scheme, offering state assistance to first-time buyers.
It remains to be seen how the situation will evolve and what actions banks and the government will take to alleviate the challenges faced by borrowers in the British mortgage market.
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