Following HSBC’s surprise decision to withdraw all its mortgage deals for new customers late last week, ahead of yet another hike in interest rates, several other lenders have followed suit.
Clydesdale Bank, part of Virgin Money group, and Saffron building society have both withdrawn mortgage products for new customers as market jitters continue.
Mortgage brokers described the market as being in a ‘state of frenzy’.
Lenders are removing deals from the market at short notice and repricing fixed rates higher as swap rates – the level at which banks lend to each other – have increased significantly in recent days. Lenders use swap rates to price their own fixed rate mortgage deals for customers. It is hoped that HSBC and Clydesdale will relaunch their fixed rate deals later today, but brokers are expecting new deals to be priced at ‘much higher rates’. Saffron building society has also withdrawn a range of its fixed rate mortgage deals, including 5% deposit deals for first-time buyers and some buy-to-let products.
Mortgage brokers call for more notice of product withdrawals
Mortgage brokers have expressed concern about products being removed with little or no notice. Hundreds of mortgages have been withdrawn from the market or repriced in recent weeks. It comes as lenders respond to rising swap rates amid concern about higher than expected inflation and the prospect of more interest rate rises from the Bank of England.
But this is hitting borrowers, making it hard to secure a mortgage or decision in principle when rates are changing so rapidly. Robert Sinclair, chief executive at the Association of Mortgage Intermediaries (AMI), said, “AMI acknowledges the volatile market conditions and the need for lenders to protect their pipelines, margins and profitability. However, sudden product withdrawals could be seen to be indicative of insufficient pipeline monitoring. We recognise that a mandatory minimum notice period might be difficult for many, but we ask lenders to think about their broker partners and their current and potential customers by giving as much notice as possible. It would be preferable if withdrawal periods could be measured in hours and not minutes, with thought given to when cut-offs are announced, not at weekends or late in the day. It would also be helpful if lenders could commit to try to give 24 hours’ notice, with both announcement and deadline falling between 9-5 Monday to Friday. That would be of great benefit to all. We will continue to work with IMLA to see if we can establish some industry guidelines and best practice that all firms can support.”
Kate Davies, executive director at the Intermediary Mortgage Lenders Association (IMLA), added, “there is currently much comment in the press about the number of mortgage products being withdrawn from the market, often at very short notice. This is frustrating for brokers, customers and lenders, but decisions to withdraw products and re-price are taken only when absolutely necessary. The root cause is the current volatility in the swaps market, combined with the continuing speculation about further rises in Bank of England base rate.In practice, we do not think there could ever be a ‘one size fits all’ approach to giving notice of the withdrawal of a particular product. This is due to different lender funding strategies, which will drive the need for some lenders to move very quickly in order to remain prudent and profitable when there are large and sudden increases to funding costs. IMLA members do take this issue very seriously and will continue to do their best to give brokers as much notice as is reasonably possible when a product is about to be withdrawn. We all look forward to a less bumpy outlook when interest rates and markets settle down.”
Homeowners set for ‘mortgage shock’ as rates rise and products disappear
Almost 400,000 borrowers on low-rate mortgage deals are in for a shock when their products expire this year, Equifax has warned. Analysis by the credit reference agency found that 7.7m of the 10.7m currently open mortgages are on a fixed-rates. More than 367,000 of these fixed-rate mortgages are due to come to the end of their five-year deals over the next year, the majority of which have an average outstanding balance of £170,000.
This will mean an average increase in monthly repayments of around £300 if customers revert to a variable rate without fixing to a new deal. Many of these customers will have fixed at low rates, in some cases close to 1%, while pricing has surged in recent months and lenders such as Nationwide, HSBC and Santander have withdrawn products amid concerns about the cost of borrowing rising further.
With fixed-rate mortgage offers currently hovering around 5%, consumers will be faced with substantial increases in monthly expenditures amid already constrained pay growth and persistently high inflation, Experian warned. For those entering the housing market, average monthly repayments have increased by 40% over the past 18 months.
The average mortgage applicant at the end of 2021 would pay around £1,000 a month, whereas now they could pay up to £1,400, Experian said.
Mortgage payments will likely take up more than 50% of people’s monthly income, whilst households try to manage skyrocketing bills and turbulent interest rates, Experian suggests. These factors could also make buyers more cagey when it comes to looking for and making an offer on a property.
Paul Heywood, chief data and analytics officer at Equifax UK said, “there is a risk that some consumers could become mortgage prisoners with the current state of rates. Among these consumers, we expect to see a gradual increase in missed payments. Diminishing affordability levels may also restrict or even stall growth in house prices, perhaps leading to a correction in the housing market. The starting point for lenders and credit providers is to understand which of their customers are most likely to be impacted by rising mortgage rates, what the extent of that rise is likely to be, and the likely timing of that impact.”
Mortgage approvals for house purchases drop in April, as net borrowing hits record low outside of the pandemic
The amount borrowed in new mortgages dipped in April to a new record low, according to the latest Bank of England data, as higher rates continued to put buyers off. Net mortgage borrowing fell by £1.4billion in April, going from net zero in March to £1.4billion of net repayments. This brought it to its lowest level – excluding the period during the Covid pandemic – since records began in 1993.
The number of mortgages approved for house purchases fell by more than 5%t in April, from 51,500 in March to 48,700. Mortgage rates are back on the rise with with the number of mortgage products on the market falling by 7% in a week, as lenders respond to higher-than-expected inflation and predictions of further base rate hikes.
Higher interest rates weigh heavily on bank lending: Mortgage approvals fell from 51,500 in March to 48,700 in April according to the Bank of England
© Provided by This Is Money
The average interest rate on new mortgages rose by 5 basis points, to 4.46% in April, according to the Bank of England. That number is likely to increase in the next set of figures, as several major lenders have put up their rates in recent weeks. Mark Harris, chief executive of mortgage broker SPF Private Clients said, 'with mortgage approvals slipping in April, it looks as though buyers are concerned as to what's going on in the wider economy and what they can afford. The worst of the pain may not be over with another quarter-point rate rise expected this month as inflation proves to be more stubborn than the Bank of England previously forecast."
Laura Suter, head of personal finance at AJ Bell says "for many homeowners it’s just not an option to borrow more money and move to the next house on the ladder with interest rates where they are., and others are too nervous about the direction of rates and the housing market to make that next house move – so staying put seems the safest option."
Why is there less appetite to buy?
Lower mortgage approvals for house purchases suggest that buying appetite remains subdued. Much of this will be down to higher mortgage rates, as well as concerns about the wider economy in general. The housing market is already beginning to feel the impact, with average house price recording their biggest annual fall in nearly 14 years last month, according to Britain's biggest building society.
Property values fell 3.4% annually in May, representing the biggest drop seen since July 2009 when an annual fall of 6.2% was recorded, Nationwide said.
At the same time, inflation is proving stickier than many had been expecting and this has caused swap rates to rise. What the financial markets think will happen is reflected in swap rates. A swap is essentially an agreement in which two banks agree to exchange a stream of future fixed interest payments for another stream of variable ones, based on a set price.
Five-year Sonia swaps (used for mortgage pricing) have increased to around 4.4% in recent weeks, up from 3.8% at the start of May. However, Chris Sykes, a mortgage consultant at Private Finance says, "there is no cause for panic, and that as things stand, this is not a repeat of the mini-Budget when even the cheapest mortgage rates rose above 6%. They are not a cause for manic panic, more so a chance for lenders to reprice their rates in response to the increased cost of borrowing and changed expectations regarding the future base rate."
Why British homeowners face the worst mortgage shock in the world
Britain is one of the only countries in Europe where 80% of existing mortgages, and 90% of new mortgages, are propped up by short-term fixed rates. It also differs considerably to the US, where the majority (around 70%) of borrowers take out 30-year fixed rates – a product billionaire investor Warren Buffett once called “the best instrument in the world”.
It means that in times of economic shock, the UK’s short-term fix model – which sees lenders fund mortgages with borrowers’ deposits – leaves homeowners “much more exposed to interest rate risk”, according to experts. This is because borrowers carry the interest rate risk in the UK, rather than the lenders.
Back in 2021, some of Britain’s high street lenders were offering sub-1% two-year fixes. Now those same lenders are offering their cheapest two-year fixes at 5.27%. This means those who locked into a mortgage two years ago in the UK now face their repayments doubling, trebling – and in some rare cases, quadrupling.
While fixed-rate mortgage deals of up to around ten years have been available for some time in the UK for many years, they tend to come with higher rates than two or five-year deals because they cost lenders more money to offer them. In other countries – such as the US, as well as France, Germany, Denmark, and the Netherlands – alternative funding models mean lenders carry the interest rate risk thus making longer-term mortgages cheaper.
Rather than funding mortgages through current accounts and short-term fixed rate deposits like the UK, in these countries lenders use money from longer-term funding sources – such as pensions, which can only be withdrawn after a certain date – to prop up borrowers’ mortgages. This means they can take on the credit risk themselves and offer longer-term fixes because they have the guarantee that the funds will remain there for the duration.
In Denmark, regulators have gone one step further. Danish borrowers most vulnerable to interest rate shocks can only – by law – take out mortgages with long-term fixed rates, minimising the risk to them even further. In the US, repayment charges are somewhat lower than in the UK, which means even if you lock in to a 30-year fixed rate, it is relatively cheap to remortgage if rates fall, and easier to move.
Christian Hilber, a university professor at the London School of Economics said, “British borrowers are much more exposed to interest rate risk. The UK, where the typical mortgage sits on a two-year fix is the most common, does stand out on this front. In the US, they sell their mortgages to Fannie Mae and Freddie Mac [firms which guarantee most of America’s mortgages]. They then bundle these mortgages and sell the risk to investors. This allows them to spread the risk.”
But this model has had its drawbacks, too. During the 2007 financial crisis, the subprime market collapsed and lending froze. This was exacerbated by lax regulation, much like in the UK, which had allowed lenders to issue mortgages based on shaky affordability.
Weighing up pros and cons
Andrew Wishart, of Capital Economics said, "30-year fixed rate mortgages in the US have helped prevent significant house price falls over the years. But these products have also put people off moving, he said, because doing so would involve taking out a much more expensive mortgage. The result has been an extremely limited number of homes on the market which makes it harder for people to move for work. Fixed rate mortgages also delay and reduce the impact of higher interest rates on the economy, meaning interest rates have to rise further and making it more likely central banks raise interest rates too far.”
Iwona Hovenko, real estate analyst at Bloomberg Intelligence said, "that in France fixed-rate deals tend to be available for the whole mortgage term, with refinancing not as common and potentially resulting in hefty fees. This reduces property market volatility and increases buyers’ certainty, but may also limit homeowners’ flexibility.”
To avoid the early repayment charge, borrowers can move house by moving their existing loan to a new property, getting additional advances on that loan or taking out another loan alongside the existing one.
Ms Hovenko also pointed out that the UK is not necessarily the “worst” mortgage market, as variable-rate or very short-term fixed rate mortgages are much more common in many other countries too.
These included Sweden, Canada, Australia, New Zealand and Poland. She added, “several of these countries have seen steep house price declines as a result of the soaring monthly mortgage repayments, reversing previous steep rises in property prices.”
‘A ticking time bomb since 2013’
Arjan Verbeek, of long-term mortgage firm Perenna said, "the situation today could have been predicted as far back as 2013. Between 2000 and 2008, banks printed lots of money and mortgage lending was too loose. House prices and mortgage debt grew at the same rate. Suddenly, lenders had a lot of debt and very low rates. It was obvious we had a ticking time bomb. Banks have since rolled back interest rates, inflating prices even more. The people suffering are now ordinary borrowers, other countries have so far had a reason to reform their mortgage system, unlike the UK.
In the US, they had the Great Depression after which they needed pension funds and insurance companies to fund mortgages, and not the banks. In Copenhagen, they set up the Danish mortgage bank system after one fourth of the city was burned to the ground in 1795. In Germany, some 200 years ago after the Prussian War, a new system was set up to invest in rebuilding companies.
In the UK, we’ve never needed a reason to change mortgages. We’ve stuck to deposits. We’re now at that point where we need to change too, because we haven’t had the problems we see now until now.”
Comparing the US and UK
A big difference between the UK and the US is what happens when the value of your home falls below the value of your mortgage.
In the US, there is no recourse. This is why homeowners in Nevada during the last financial crash could simply pop their keys through the letterbox and walk away. In the UK, you cannot walk away from your property if this happens. You are obligated to pay back the difference.
Mr Hilber said, “this creates a form of stability and is why we don’t see high default rates. But recourse and longer-term fixes are not mutually exclusive. You can do both of those things, they are not tied. The problem the UK has now, with its model, is that for the past 20 or 30 years, interest rates have largely come down. My colleagues don’t remember high inflation and interest rates – they’ve had to read about it. For a long time, the UK model has worked well, but now we’re in trouble. The Bank of England can solve inflation with interest rate rises, but if they do it too quickly this will have a detrimental impact on our mortgage market.”
The number of mortgages taken out in the UK has been on a slow decline. In 2005, some 57.1% of homeowners had a mortgage, but by 2021 this had fallen to 46.4%. Meanwhile, the number of existing mortgages attached to two-year fixes has risen in recent years – from 73.6% at the beginning of 2020 to 83.6pc at the end of last year, according to the European Covered Bond Council.
The two-year broker churn model
Richard Fitch, of mortgage technology firm MQube says, "long-term fixed rate loans are not the answer to all the problems in the UK mortgages market. Some people will be better off with trackers, others with two-year or five-year fixed rates – it depends on the situation. But it would be nice to have better, customer-friendly long-term fixed products in the UK for those that want them.”
He also highlighted that the current mortgage market props up short-term remuneration for brokers, when longer-term remuneration models need to be considered. In the US, lenders largely operate on an in-house broker model, while in the UK independent brokers are paid a procurement fee for every mortgage they bring onto a lender’s books.
Around 80% of mortgages in the UK are currently written with the use of an independent intermediary. Brokers work on a two-year churn model, which is reflected in the short-term fix trend across Britain.
Mortgage mayhem goes on as two-year rates cross 6% threshold
Homeowners are set to face even more mortgage pain, as the average interest rate on a two-year fixed-rate deal broke the 6% barrier. Those higher rates will come without fresh government support, as Rishi Sunak this morning said there won’t be extra help for people struggling to make payments.
According to new data from Moneyfacts, the rate for a two-year fix increased from 5.98% to 6.01% on Friday. That’s the highest rate since the aftermath of Kwasi Kwarteng’s disastrous mini-Budget last Autumn, when rates skyrocketed to peak at 6.65%. Five-year rates were also up from 5.62% to 5.67%. Buy-to-let rates rose even faster, with two-year rates up from 6.21% to 6.3% and five-year rates up from 6.17% to 6.23%, meaning renters and landlords will likely pay more too.
The latest price rises followed a surge in gilt yields — the return on government debt which lenders use to price their mortgage offerings — after inflation proved ‘stickier’ than expected in April and wage growth accelerated. That prompted all major lenders to reprice their mortgage products, with some doing so twice.
Homeowners had hoped to see fresh government support to deal with their higher payments, but Rishi Sunak ruled out additional help yesterday. Levelling Up Secretary Michael Gove suggested the Government was considering fresh help, saying he was “concerned” by events in the mortgage market.
Mr Gove told Sky News’s Sophy Ridge On Sunday show, “when it comes to mortgages, it’s the independent Bank of England’s interest rate decisions that will govern that, but we are looking at everything that we can do in order to help homeowners through this difficult period.”
But speaking on ITV’s Good Morning Britain, Sunak said, "the Government needs to “stick to the plan” rather than offer new help. I know the anxiety people will have about the mortgage rates, that is why the first priority I set out at the beginning of the year was to halve inflation because that is the best and most important way that we can keep costs and interest rates down for people.”
Even higher rates could be on the way, as another 240 mortgage products were taken off the market on Friday. The Bank of England will announce its latest interest rate decision on Thursday, with a 13th consecutive rise all but certain. The Bank is expected to keep hiking rates this year, with markets pricing in a 50% chance that rates hit 6% in early 2024.
With most mortgage-holders still on fixed-rate deals agreed at a time of lower interest rates, experts expect a ‘mortgage time bomb’, as fixed deals expire and homeowners are forced to agree new deals with higher rates.