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Mortgage lenders raised rates again this week, intensifying fears of a significant drop in house prices as buyers and homeowners struggle with higher borrowing costs.
In a letter to brokers, HSBC said on Thursday evening that it was pulling its range of new residential and buy-to-let mortgages offered via brokers. They will only return to market on Monday with rates expected to increase across many products.
Nationwide, the UK’s second largest mortgage lender, updated its rates on Friday, with fixed-term mortgages rates rising by as much as 0.25 percentage points, while tracker rates — which are a much smaller proportion of the market — fell by up to 0.85 percentage points. Other lenders, including Halifax, Monmouthshire Building Society and West Brom Building Society, also repriced or withdrew products this week.
The moves follow several weeks of rising mortgage rates, with lenders including Santander and Accord, part of Yorkshire Building Society, increasing prices last week. Costs have risen in the wake of official figures last month showing stubbornly high core inflation in the UK. This changed market expectations for how long the Bank of England will have to keep raising interest rates.
“We are at the stage where it is not clear when these rate increases will slow down, some lenders have raised their mortgages two or three times recently,” said Aaron Strutt, product and communications manager at broker Trinity Financial.
The housing market, which was just starting to find its footing in the spring after the shock of the autumn mini-budget, now faces a fresh headwind from the strain on mortgage affordability.
“Mortgage rates around 5 per cent are probably the tipping point,” said Aneisha Beveridge, head of research at Hamptons. “Most households are still able to manage mortgage rates in the high fours. It does feel like the 5 per cent mark starts to make it really quite unaffordable for some people,” she said.
Five-year rates have climbed to 5.41 per cent on average, according to finance site Moneyfacts, up from 4.97 per cent at the beginning of May. Over the same period, average two-year fixed rates climbed from 5.26 per cent to 5.83 per cent on Friday.
Higher mortgage rates will stretch the budgets of prospective buyers, especially those trying to get on to the housing ladder. Mortgage payments for first time buyers had already risen to 37 per cent of take-at-home pay in the first quarter — the highest since 2008 — according to the mortgage provider Nationwide.
“First time buyers are struggling in the market,” said John Ennis, chief executive of estate agent Chestertons. He added that there were fewer buyers with small deposits and a higher share of international investors, cash buyers and those with financial help from their parents. “It’s not a healthy market,” he said.
Rising borrowing costs will also hit the finances of millions of homeowners, who will have to remortgage at higher rates when their contracts end. Bank of England data showed that during this year, some 430,000 households would need to refinance each quarter. “We are now more concerned about arrears than we were,” said Andrew Wishart, senior property economist at consultancy Capital Economics.
Higher mortgage costs have already had a cooling effect on the housing market. Mortgage approvals fell to 48,690 in April, less than half their November 2020 peak and down 26 per cent from the same month in 2019, before the pandemic, according to BoE data.
House prices are easing according to most indices, with Nationwide reporting an annual fall of 3.4 per cent in May, the largest drop since 2009 and a 4 per cent fall from August’s peak.
Capital Economics forecast that house prices would fall another 8 per cent by mid-2024, and said the recent change in mortgage rates made that scenario more likely. Credit company Moody’s on Thursday predicted a 10 per cent drop over two years, which it blamed on “persistently high inflation and the recent spike in lending rates”.
Beveridge said market sentiment was a key factor in house price levels, and would be affected by the unpleasant inflation surprise. “The risks are certainly higher than they were a couple of weeks ago,” she said.
Buyers are hoping for discounts to compensate for paying more on their mortgage. “The higher rates do feature in every negotiation, but it is not stopping transactions,” said Roarie Scarisbrick, partner at Property Vision, a prime central London buying agent. Buyers “want some of the pain that they are taking on to be reflected in the price”, he added.
Surveyors reported falling new buyer inquiries and house prices in May. While the pace of the fall eased compared with previous months, the Royal Institution of Chartered Surveyors warned that the “expected further Bank of England interest rate rises will likely dampen positive trends”.
However, many experts say that the market is not likely to drop as precipitously as it did during the financial crisis. House prices fell by 17.5 per cent between November 2007 and April 2009, regaining their pre-crisis level only in 2014, according to data from the office for national statistics.
In the current downturn, house prices are expected to be supported by various factors, including a robust and tight labour market, historically low housing supply and an improving economic outlook.
The latest official statistics showed that the UK unemployment rate remained close to its lowest since records began in 1971, with over 1mn job vacancies. Moreover, in May the BoE indicated it no longer expected real household income to fall as gas prices dropped sharply from their August peak, boosting expectations that the economy will avoid a recession.
Economists polled by Consensus Economics now expect unemployment to rise less than previously forecast. With the jobs outlook improving, housing analysts will be keenly watching monthly inflation rates.
“So much of it is riding on these inflation figures. That is what it is all coming down to,” said Beveridge.
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