Thousands of Londoners have been warned they are facing a major mortgage ‘shock’ with some paying an extra £10,000 a year as the Bank of England raises interest rates to tackle runaway inflation and restore confidence in the British economy.
The warning came as Prime Minister Liz Truss and Foreign Minister Kwasi Kwarteng held emergency talks with the independent fiscal watchdog, the Office for Budget Responsibility, in a bid to calm financial markets following last week’s mini-budget.
Kwarteng’s plan to cut taxes by £45bn and spend a further £60bn on freezing power bills led to a rise in the cost of government borrowing, forcing the central bank to shore up pension funds and raised fears that interest rates could rise further. and faster than expected.
Amid the volatility, more than 40 percent of new mortgage products were pulled from the market this week, according to financial website Moneyfacts. As lenders scramble to reprice deals, housing market experts predict the Bank of England’s Monetary Policy Committee could raise rates to six percent by next spring, pushing interest rates higher. loans at levels not seen in more than two decades.
Many homeowners who closed term agreements of just over one percent now face a massive increase in their monthly payments as those agreements expire. Of the 2.1 million mortgage holders in London and the South East, an estimated 27 per cent – more than one in four – have fixed-rate mortgages due in 24 months or less.
New data compiled by mortgage brokerage firm L&C suggests that if mortgage rates rise from 1.5 per cent to five per cent, then an average London homeowner with a £350,000 mortgage could face a £350,000 increase in payments. 647 per month, or £7,764 per year. At six per cent, the jump is £856 per month, or £10,272 per year. L&C’s David Hollingworth said: “Many borrowers will currently be protected from increases, as the vast majority have opted to lock in their rate in recent years.
“However, those borrowers could face a substantial increase in their interest rate when the deal ends, resulting in a potential payment shock at a time when other costs are also rising.” Mortgage market experts said they were already seeing an average increase in tracked and fixed rates to 4 percent, after the bank raised the base rate by 0.5 percentage point to 2.25 percent last Thursday.
But the Bank’s chief economist, Huw Pill, has signaled he is prepared to launch a “significant monetary policy response” to protect sterling after the pound plunged to a record low of $1.03 on Monday. On Friday, the pound rallied against the dollar on the news of the Prime Minister’s meeting with the OBR, rising to $1.12 in early trading this morning.
Although interest rates on government loans, a crucial benchmark for mortgage lenders, have also fallen since the central bank launched a £60bn bond purchase program to restore financial stability, gilts still they are about a percentage point higher now than they were at the end. of August.
Lucian Cook, head of residential research at 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 accurately predict what the future holds for conventional real estate market. .
“At a minimum that indicates a pause in the market in the immediate term. Much 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 rise in interest rates.”
Ray Boulger of John Charcol mortgage brokers said many lenders will stress-test borrowers to see if their family budgets can afford the 7 percent interest rate.
But banks and building societies may not have taken into account the cost-of-living crisis that has caused energy, fuel and food prices to surge this year. He added that he expected to see a 10 percent drop in property prices as interest rates reduce demand.
With Labor opening a 33-point lead over the Conservatives, according to a YouGov poll, concerns about Mrs Truss’s tax cut plans and the fact that it is not set out how they will be paid will remain at the annual conference of the Conservatives from this weekend. in Birmingham. On Friday, the Liberal Democrats called on the government to hold an emergency summit with lenders and reiterated their call for an emergency support package for struggling homeowners.
Treasury Secretary Andrew Griffith told the BBC that rising interest rates were not just a UK problem: “We understand the aspiration to buy your own home and we understand the concerns of every household in this country. . It is important that we understand the context in which we are working to try to help people. But that is a largely global phenomenon.”