How will the mortgage market respond to 100bps hike?

Government borrowing costs rise amid investor scepticism

How will the mortgage market respond to 100bps hike?

Mortgage experts have given their response to the Bank of England’s (BoE’s) expected 100-basis point increase in November, which could see the cost of borrowing soar beyond the reach of many would-be homebuyers.

According to reports, the markets have already assumed there will be a one-percentage-point interest rate increase at the November 3 policy meeting, meaning the base rate will jump from 2.25% to 3.25% - the single biggest increase since 1988.

The average mortgage interest rate on a two-year fixed term mortgage is currently 6.3%, while the five-year fixed term is 6.19%, according to Moneyfacts.

Industry experts are mulling over how a 100bps jump could affect borrowers, lenders and brokers, and whether it might lead to a large swathe of the population simply giving up on buying a property. Additionally, it may also cause house prices to tumble by around 10% next year.

On Monday, financial expert Martin Lewis warned about “a ticking time bomb on mortgages” due to a combination of rising interest rates, a fall in house prices, which would lead to more stringent affordability checks, and borrowers coming to the end of their loan terms.

“I am concerned when mortgage rates go up, more people will fail the affordability check,” he said, pointing out that borrowers would either be restricted to their lenders’ fixes or forced to switch to a more expensive standard variable rate.

“If the current (house) value drops, your loan to value goes up, and that means it’s more difficult to get a mortgage,” he said.

He called on the regulator, the government and the BoE to review affordability tests and mortgage holidays, and to extend and reduce their terms, warning that if this wasn’t done by Christmas a bailout might be needed.

Keith Barber, director of business development at The Family Building Society, said it was not possible to know what the BoE would do yet as there were “a large number of macro uncertainties between now and the next scheduled MPC meeting”.

He told Mortgage Introducer: “What we do know is that we already have higher interest rates being charged by lenders for fixed rate mortgages and these will undoubtedly have an impact on borrowers who had got used to the very, very low rate environment of the last 10 to 12 years.”

He added that as most borrowers were on a fixed rate “it will take some time for the effects of the current higher rates to work through”. 

He went on: “Variable rates are significantly lower at the moment. They are likely to go up in response to a further increase by the Bank of England, but it’s not clear to what level. In the longer term, we see demand for owner occupied housing holding up as we’re simply not building enough homes. In the shorter term, the impact of higher rates will certainly reduce demand temporarily and there will be some price reductions as buyers and sellers adjust to this new environment.”

Richard Pike, chief sales and marketing officer at Phoebus Software, said he was not convinced the BoE would increase the base rate by 100bps.

“Psychologically, if it’s kept to 75bps this will be seen as far more positive in the lending community,” he commented.

“Most lenders will rein in risk and expect better affordability to be proven on >70%/75% LTV lending. Those that are data savvy will possibly also stop lending in certain geographical regions that are showing signs of major economic strain.”

He said as asking prices for houses were already being reduced, introducing further large rate rises might “exacerbate the situation further” and impact on affordability.

“If affordability is tight at point of completion, what it will be after all the additional purchases associated with a new build is something that can’t be factored in.”

Asked if would-be homeowners would be put off trying to buy a home, he said: “A younger generation of British citizens are now more accepting of the fact that renting for the long term is probably the way they will have independence and a roof over their heads, so this clearly plays to the buy-to-let market.”

He also suggested that there would be a property price drop in certain parts of the country. 

Borrowing costs

Government borrowing costs shot up on Monday after investors appeared unconvinced by Chancellor Kwasi Kwarteng’s attempts to reassure the markets.

Kwarteng has now brought forward the release of his debt plan details to October 31 - three weeks earlier than originally intended - after last month’s controversial mini budget caused the markets to panic.  

The chancellor will then explain how he will fund billions of pounds in tax cuts while reducing debt.

However, bringing the date forward has so far failed to allay investors’ concerns after gilt yields rose again on the 30-year bond to 4.7% in late-afternoon Monday trading.