UK housing crash – what could make it happen?

How lenders are responding to the highest interest rate increase in a decade

UK housing crash – what could make it happen?

Is a housing crash in the UK imminent? While the nation’s economic future remains unclear, what is clear in the eyes of some experts is that the UK’s reliance on short-term mortgages isn’t helping matters. And neither is the Bank of England’s recent rate hike amid warnings that inflation could hit 10.25% in the coming months. To get a better understanding of how we got here—as well as what it could mean for your repayments—read on.

What is fuelling the potential UK housing crisis?

The United Kingdom housing market’s reliance on short-term mortgages has made the UK economy increasingly vulnerable compared to other markets worldwide. Compared to the US and many other countries within the European Union—which typically offer 30-year fixed-term mortgage loans—homebuyers in the UK prefer short-term loans of under five years. This trend includes tracker mortgages that follow the base rate of the Bank of England.

Some experts believe this reliance on short-term mortgages puts the UK at an even greater risk at times when rates increase, causing “a trigger effect” that immediately impacts household incomes. After Russia invaded Ukraine in February, Cribstone Strategic Macro founder Mike Harris accused former Bank of England governor Mark Carney and his predecessors of not doing enough to address short-term mortgages during their time in office.

“The consumer has all this extra pressure associated with the sanctions and gas prices and everything like that,” Harris said. “So I blame Mark Carney and his predecessors for not having extended the duration of use of UK mortgages. It’s insane.”

The Bank of England last month raised rates by a quarter percentage point to 1% in an attempt to slow spiking inflation, which some fear could reach 10% before 2023. Currently, rates are at their highest point since 2009.

How did mortgage lenders respond to the highest rate hike in a decade? 

That Bank of England move arrived amid warnings that inflation could skyrocket in the coming months. The hike marked the fourth time in a row that borrowing costs have been raised—which put rates at their highest level in some 13 years. After a “sharp slowdown” in economic activity, Bank of England governor Andrew Bailey suggested a recession was becoming increasingly likely.

The rate increase will also force more than two million homeowners on variable rate mortgages in the UK to make higher payments. The majority of homeowners, however—roughly 80%—won’t be directly impacted since they are on fixed-rate mortgages. Regardless, Paul Johnson, the director of the Institute for Fiscal Studies, told the BBC in May that mortgage interest payments could even double this summer.

“We are still at historically staggeringly low levels of interest rates,” Johnson explained. “So you look at it that way and think 0.25% [or] 0.5%, still a very low level, that doesn’t look very dramatic.” However, he added: “If you’ve got a mortgage and it goes up by 0.5% or 1%, proportionally that’s a very big increase. That could be doubling your mortgage interest payments over a period of time.”

What does the rise in the Bank of England rate mean for your repayments?

For the estimated 850,000 mortgage borrowers currently on a tracker rate mortgage in the UK, a 15-percentage-point rise in the Bank of England’s rate could result in an average increase of £15.45 in repayments per month, according to research conducted by trade specialist UK Finance. While some 74% of homeowner mortgages in the UK are on a fixed rate, there are reportedly 1.5 million fixed-rate mortgage deals that are expected to expire in 2022, and another 1.5 million are due to expire in 2023.

The research noted that since 2019, 96% of new homebuyers have been opting for longer-term options. For this reason, most borrowers would not see any immediate increase in their monthly repayments. The research also found that the number of fixed-rate mortgage borrowers that opted for five-year fixed rates has also increased significantly since 2017 – rising from less than three in 10 that year to about 45% of borrowers by 2021. Over that same period, the number of people in the UK on two-year fixed rate mortgages has decreased by a similar proportion.

Perenna COO Colin Bell told Mortgage Introducer last month that the UK finance industry should rethink how it funds its mortgages. “In the cost-of-living crisis, what would be better than to know your mortgage is never going to change while your electricity bills are bouncing all over the place? I think, in terms of instability, long-term fixes are definitely the answer… because we are seeing interest rate rises, we’re seeing inflationary pressures, we’re seeing cost-of-living prices which are hurting everyone.”