In June 2021, Monique Foulger reached an important milestone: at the age of 30, she bought her first home, a modest one-bedroom apartment in South London’s Croydon.
Barely a year and a half later, she braces herself for an almost 80 percent increase in her monthly mortgage payments.
Sharp interest rate hikes will rock the UK housing market and upend the country’s already weak economy. British homeowners are especially vulnerable because most mortgages have short-term rates that renew every few years, often every two or five years. For over a decade, ultra-low interest rates have allowed UK homeowners to jump from one low rate to the next without worry.
Now the central bank has abruptly ended the era of easy money in the fight against inflation, and millions of homeowners face hundreds, possibly thousands, of extra payments each year.
“I just buried my head in the sand,” Ms Foulger said when she first learned how much higher her payments were likely to go.
By the end of next year, two million mortgages in Britain will have reached the end of their fixed term. The change is even more severe for the 1.6 million variable rate mortgage borrowers who tend to move with any change in central bank interest rates. At its last meeting, the Bank of England raised its interest rate by three-quarters of a percentage point, the sharpest step since 1989, and took it to 3 percent, the highest since November 2008. Possibly above 5.5 percent.
The reverberations spread throughout the economy. Consumer spending is expected to collapse as households’ disposable income falls to pay higher mortgage payments on top of higher energy bills and rising food prices.
Despite the impact on mortgages, central bank governor Andrew Bailey has said interest rates must rise further to fight double-digit inflation spurred by pandemic supply chain backlogs and volatile energy prices in the aftermath of Russia’s war in Ukraine . . “There is no easy outcome,” he said this month.
Inflation FAQs
What is Inflation? Inflation is a loss of purchasing power over time, meaning your dollar won’t go as far tomorrow as it did today. It is usually expressed as the annual change in prices for everyday goods and services such as food, furniture, clothing, transport and toys.
It is not only global economic factors that play a role. The impact of Liz Truss’s tumultuous time as Prime Minister of Britain is still being felt in the mortgage market. Her plan to cut taxes and eschew economic orthodoxy caused the UK government’s borrowing costs to soar in late September and early October, driving up mortgage rates as well.
On 23 September, when Ms Truss’s finance minister, Kwasi Kwarteng, announced the tax cut plan in parliament, Ms Foulger was on holiday in France.
Ms. Foulger, eager to rest after a busy summer season at the opera company where she works, did not immediately respond to her mortgage broker’s relentless attempts to reach her about a new fixed-term loan agreement. She had six months left on her current rate — which was just 1.56 percent — and initially didn’t see the urgency.
But across the English Channel, the mortgage market quickly exploded. Homeowners scrambled to set their rates before rates rose further, while banks withdrew mortgage offers as bond markets moved too violently to price-fix.
In the end, Ms Foulger tentatively agreed to a flat rate of 5.89 per cent for two years, taking her monthly payments from £444 to £791 ($941). The change won’t take effect until spring, but because she was already afraid of an increase, she said she started eating less and socializing.
“It was rushed,” she said. The broker was “afraid it would go up again”.
In the past month, almost all of Ms. Truss’s policies have been reversed. Treasury yields have fallen and traders have significantly lowered their bets on the size of the central bank rate hike. Yet mortgage interest rates have hardly fallen. On Wednesday, the two-year average fixed rate was 6.25 percent, slightly down from a peak of 6.65 percent on Oct. 20, according to Moneyfacts, a financial information service.
Ms. Foulger, like millions of others, hopes these mortgage rates fall further so that by the time her current arrangement expires in March, she can cancel her 5.89 percent offer and get something better.
Deciding when to make a new mortgage offer is the dilemma facing households across the country: sign now and buy security or wait and hope rates drop, even just a little bit.
“The natural inclination will be to fix, but they have such a nagging doubt whether rates are going to fall again,” said David Hollingworth of L&C Mortgages, a major brokerage and consulting firm.
Dan Taylor, 39, has gone back and forth on what to do. The two-year fixed-rate mortgage on the three-bedroom Victorian house he and his wife own in Exeter, in southwest England, expires at the end of February.
When they bought the house in 2008, they paid £900 a month. “Then everything went in our favor,” said Mr. Taylor. Interest rates fell and mortgage payments fell to £500, with renewals every two or three years.
“We have been unusually spoiled with such low rates for so long,” he said. But now it’s a more difficult situation, he said. They have two young sons, increasing the couple’s expenses while limiting the hours they can work due to the need for childcare.
For weeks, Mr. Taylor regularly checks the new rates offered by his lender. They’ve improved slightly in recent days, but he still expects his monthly payments to increase by at least £150.
Interest rates have risen so fast that Mike Lawlor of the Mortgage Advisory Firm, who has been a broker for nearly two decades, was blindsided.
“We could see rates rise a little bit earlier this year,” he said. “Although I’d be lying if I said I thought rates would be around here.”
His phones, he said, “don’t stop ringing.” Nestled in one of north London’s affluent neighborhoods with homes worth £1m to £3m, he said his clients were worried about rising rates – and rising costs in general.
“It’s not just the mortgages, it’s everything,” he added. “It’s like a real tsunami right now, hitting people from all sides.”
For the time being, there are few expectations that rising interest rates will lead to large numbers of defaults and home foreclosures. Banks are being told by Britain’s largest financial regulator to do more to support customers in financial distress, while stricter affordability tests since the 2008 financial crisis mean households should be better able to cope with a rise in debt. manage interest rates.
And the banks themselves seem relatively optimistic, recently noting to shareholders that default rates are low. “British banks have the ability to withstand the impact of severe economic fallout,” the Bank of England’s committee that monitors financial stability risks said last month.
But even without repossessions, the impact of rising mortgage rates is expected to be far-reaching. There are signs of tension in the housing market: House prices fell in October for the first time since July 2021, according to Nationwide Building Society, a mortgage lender. Experts warn it will be more difficult to get mortgages to buy rental properties, while fewer first-time buyers will qualify for stricter affordability tests.
For people with mortgages that track central bank rates, rising interest rates create more immediate anxiety.
Mete Coban, 30, switched in March to a so-called fixed tracker rate, part of which does not change and the rest moves with the central bank’s rate. At the time, the Bank of England had raised interest rates a few times, to 0.75 percent, back to pre-pandemic levels.
“I took the risk” that interest rates could rise, Mr Coban said. Because they had been so low for so long, he feared perhaps a 1 percent rate. “That’s not too bad, but who had ever seen that 3 percent?”
Now he estimates he will pay £450 more per month than he paid in March for his flat in East London’s Hackney.
Mr. Coban, like many others, is animated by the failure of Ms. Truss’s and Mr. Kwarteng’s economic policies. He is an elected official on his local council and has been shortlisted to stand as a West London MP for the opposition Labor Party, which has recently gained a significant lead in opinion polls.
Ms. Truss and Mr. Kwarteng’s decisions “had a direct impact on so many households and people’s livelihoods,” he said. “Even if they have lost their jobs, they are no longer Prime Minister and Chancellor, we still have to pick up the pieces.”
