UK’s Housing Market In Mortgage Crisis
November 2, 2023

The UK housing market has been a source of pain for many people. With every new move, the misery that home buyers, homeowners, and tenants face intensifies. The dark cloud that has been hanging over the UK housing market shows no sign of a silver lining, despite a majority of people desperately looking for one. So much so that they are willing to create an artificial one if it eases the burden that they are bearing in terms of fulfilling the basic need of having a roof above their head. Unfortunately, it appears that the newly materialising mortgage battles are tightening the noose around the housing market’s neck. 

Jedidajah Otte, writing for The Guardian, brings forth the situation of Violet; an advertising manager from Oxfordshire, in an article titled “I was really shocked: would-be UK homebuyers describe their mortgage battles”. Violet approached Barclays to explore her mortgage possibilities for purchasing a new property in 2023. While initially, the bank was willing to extend a loan amount well beyond her actual requirements, with all of the family’s other income and expenses remaining unchanged, the bank unexpectedly decreased the amount they were willing to lend by £250,000. When an explanation was sought from Barclays, they conveyed how due to recent economic developments, they have substantially increased the estimated average cost of living per person. 

Violet is just one of the many home-buyers who have to fight tooth and nail to be able to obtain a residential mortgage. Not only is it nearly impossible to be eligible to receive a mortgage, but the current status is pushing up the mortgage bills by a considerably big margin which is having a direct impact on people’s cost of living.  In an article titled “UK homeowners brace for more mortgage pain as borrowing costs shoot up”, penned by Anna Cooban, as per Samuel Tombs, the chief UK economist at Pantheon Macroeconomics, households with an average two-year fixed-rate mortgage, which encompasses 75% of the property’s value, could potentially see an increase of around £500 ($634) in their monthly payments if they were to refinance their mortgage at the current rates.

The housing market in the UK did witness a rebound at the beginning of 2023 following the disruption caused by the previous Prime Minister Liz Truss’s tax-cutting proposals, which were not adequately funded. However, in recent months, both existing homeowners and prospective buyers have encountered fresh challenges related to mortgages.

A mortgage crisis

In June 2023, the Bank of England made a significant move by raising interest rates by half a percentage point. This decision came after recent data showed surprisingly persistent inflation. Unfortunately, this rate hike will have negative consequences for individuals with mortgages and will also exert additional downward pressure on housing prices.

This choice, marking the 13th consecutive interest rate hike, has elevated the primary borrowing cost for commercial banks in the United Kingdom to 5%, the highest level since April 2008.

As mentioned on CNN, Bank of England Governor Andrew Bailey explained how while the economy is performing better than anticipated, inflation remains unacceptably high, and it’s something that they must address. He elaborated on how the bank is aware that this is a challenging situation. Many people with mortgages or loans are understandably concerned about how this will impact them. However, if rates are not raised immediately, the situation could fall from the frying pan into the fire in the near future. The bank’s commitment is to bring inflation back to the 2% target, and therefore they ruled this action as mandatory and unavoidable. 

Financial markets are currently anticipating that the Bank of England’s benchmark interest rate will reach 6% by the end of the year, a level not seen in two decades. This aggressive move is part of a growing effort to combat the rising cost of living. However, interestingly, in September 2023, the Bank of England decided to hold the interest rates steady at 5.25%, making it the first time in nearly two years. The call was made in response to unexpected data indicating a decrease in inflation during the month of August. 

Whatever the reasons the bank may provide the public with, this development spells trouble for more than 2 million UK mortgage holders who are preparing for a significant increase in their monthly mortgage payments when they need to refinance this year and next. 

In Parliament, lawmaker Jake Berry from the ruling Conservative Party expressed deep concern, describing the situation as a “mortgage bomb” on the verge of detonation, echoing the anxieties of many citizens.

While the burden that citizens shoulder keeps gaining weight, in order to ease some of it and to address the issue of higher mortgage rates, they will dampen their expenditure. This will inevitably increase the probability of a deeper economic slowdown in the UK, catching up to the recession that they have been avoiding so far.

UK’s Housing Market In Mortgage Crisis IMG 1

The pace of repayment terms

Mark Sweney writing for The Guardian states how Experian’s (an organisation that assists businesses of all sizes to work with the right business in the most feasible manner)  analysis reveals that a significant portion of young homeowners who secured new mortgages have chosen longer repayment periods, spanning 35 years or more, in order to make their monthly payments more manageable. Specifically, during the period between January and March this year, approximately 25% of new homeowners aged 29 and below opted for such extended repayment terms. This marks a noteworthy increase compared to the more typical level of around 10% recorded by Experian in January 2020.

In the earlier part of this year, UK Finance, a trade association, reported that an unprecedented 19% of all mortgages acquired by first-time buyers in March had extended terms of 35 years or more. More than half of these first-time buyers opted for loans with durations exceeding 30 years. At the same time, 8% of individuals moving homes were also securing mortgages with terms of 35 years or longer.

This latest assessment reveals the highest proportion of 35-year mortgages on record since data tracking began in 2005. Notably, it more than doubled the rate of 9% observed in December 2021 when the Bank of England initiated interest rate hikes from the historically low level of 0.1%. However, there are indications that the surging mortgage rates may have reached their peak, suggesting a potential stabilisation or decrease in the near future.

Despite where the wind manoeuvres the sails in the future, the housing market in the UK is currently vexed. Higher interest rates have caused mortgage rates to rise which in turn have created an unrecoverable dent in homeowners’ budgets and dampened demand. It is a vicious cycle that has caused pandemonium in Britain’s £ 1.5 trillion mortgage market. And things do not appear to be improving anytime soon. 

(Sandunlekha Ekanayake) 

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