This week, almost 1,000 mortgage deals were been were pulled from the market overnight by banks and building societies after the alarm was raised over an emergency interest rate rise.
This marks the biggest daily drop on record – the previous high was 462 at the turn of the first COVID-19 lockdown – and was fuelled by a fall in the pound which sparked widespread concern that interest rates could jump to 6% by early next year.
In this article, we’ll outline why the UK has been plunged into a mortgage crisis and what it means for your deal whether you’re a first-time buyer or planning to remortgage.
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Why were hundreds of mortgage products pulled?
On Friday September 23, Finance Minister Kwasi Kwarteng announced he would be making major tax cuts and cutting stamp duty in a bid to propel property sales and encourage first-time buyers to take their first step onto the property ladder.
However, this caused the pound to plummet to its lowest ever level against the dollar and panic gripped the housing market over fears the Bank of England would raise interest rates to protect the pound just days after it increased the base rate to 2.25%, the highest in 14 years.
Halifax, Clydesdale Bank, HSBC, Santander, NatWest and Virgin Money are just some of the major banks that withdrew their products from the market with Halifax doing so “as a result of significant changes in the cost of funding.”
What does it mean for fixed mortgages?
The ongoing mortgage crisis will, understandably, have a knock-on impact on millions of people’s mortgage deals but how much your monthly payments will increase depends on a number of factors, such as the type of mortgage you have.
For example, for two-year fixed rate deals on a 25-year term, homeowners with a £150,000 mortgage will face monthly mortgage payments of £811 compared to £661 at the end of last year – an annual increase of £1,800.
However, for five-year fixed rate deals on a 25-year term, homeowners with a £350,000 mortgage will pay £1,912 a month – an annual increase of £3,804 from £1,595 at the end of last year.
What does it mean for variable mortgages?
The mortgage crisis will have a more immediate impact on standard variable rates because changes to the base rate are passed onto the borrower as it happens.
For example, homeowners with a £150,000 mortgage will have paid £825 a month at the end of last year but, due to the interest rate rise, this will rise by £1,056 a year to £912 a month.
However, homeowners with a £350,000 mortgage will pay £2,426 more a year with monthly payments increasing from £1,926 to £2,129 for the exact same deal.
What does it mean for first-time buyers?
The news will also sting first-time buyers with the weakening of the pound and rising interest rates putting lenders in a tough position where they’re no longer able to provide the same deals.
Some first-time buyers that were in the process of getting a mortgage when the news broke have even been told the interest rate on their prospective mortgage would increase from 4.5% to 10.5%, effectively pricing millions of hopeful buyers out of their first home.
Because of this, homeowners will need higher deposits to access a recent rate and it’s unlikely that the interest rate will be passed onto the savings rate, making the process of saving for a deposit much more difficult and time-consuming than it was just a matter of days ago.
Furthermore, with Help To Buy applications set to close in just over a month and the scheme scheduled to come to an end in April 2023, the news couldn’t have come at a worse time for hopeful first-time buyers.
What can you do about it?
There is, unfortunately, little you can do about rising mortgage rates and it can be difficult to predict how things will play out but homeowners are being urged to remain calm and, if they have any questions or worries, seek advice from their mortgage lender.
The good news is that mortgage products were only withdrawn as a temporary measure and the Bank of England has already launched an emergency intervention to calm the market, making some hopeful that things will recover earlier than anticipated.
The advice from industry experts is that, if you have have made a mortgage application or have agreed a mortgage deal, lenders should honour this and proceed with your mortgage as discussed.
However, if you only have a few months left on your term, it might be worth checking if your deal has early repayment charges and considering fixing early for greater peace of mind with the cheapest two-year fixed rate currently 3.75% compared to 0.84% last year.
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