UK mortgage payers grappling with the most expensive home loans in 15 years have been warned by the International Monetary Fund to brace themselves for still higher borrowing costs over the coming months.
With pay growth registering its fastest growth since modern records began more than two decades ago, the IMF used its annual health check on the economy to back the Bank of England in whatever tough action it deemed necessary to bring inflation under control.
The IMF issued its warning on a day when two-year fixed mortgage rates hit their highest level since the global financial crisis in 2008 – and MPs on the Treasury committee were told by mortgage lenders that more borrowers were likely to face financial stress over the coming months.
Since December 2021, Threadneedle Street’s monetary policy committee has raised interest rates from 0.1% to 5% in 13 successive upward moves, with some in the City predicting a further 0.5 point rise in August, after official figures showing annual regular pay growth of 7.3%.
“Should inflationary pressures show signs of further persistence, the [Bank of England’s] policy rate may have to be raised further and would need to remain higher for longer to durably lower inflation and keep inflation expectations anchored,” the IMF said.
The Bank’s governor, Andrew Bailey, fuelled speculation in the City that official interest rates may eventually rise above 6% – a move that would push mortgage rates well over 7% – when he used a speech on Monday to warn that wage and price increases at their current levels were not consistent with hitting the government’s 2% inflation target.
According to the data provider Moneyfacts, mortgage rates have already climbed above the levels temporarily reached after Liz Truss’s badly received mini-budget last September, and while mortgage lenders said they had not yet seen a surge in customers falling behind on their monthly payments, that trend could reverse if interest rates continued to rise. The typical two-year fixed mortgage rate was priced at 6.66% on Tuesday, up from 6.63% on Monday.
“What I expect to see over the next six months is that we will see more customers with financial stress,” Skipton Building Society’s interim chief executive, Charlotte Harrison, told the cross-party Treasury committee.
Any fresh increases in interest rates would mean further financial pain for about 1.4 million mortgage customers, who are expected to come off their existing mortgage deals and sign on to new contracts at a higher rate this year. It would also intensify downward pressure on house prices – which peaked last summer – and increase the risks of recent borrowers owing more than the current value of their homes.
Henry Jordan, a director for Nationwide’s home loan division, said that on average, mortgage payments have gone up a third for the building society’s borrowers, who were paying £235 more a month after signing on to a new deal.
“That said, we haven’t really seen any real material movement in arrears performance, certainly within our prime residential portfolio,” Jordan said, referring to the fact that high street lenders have been more cautious and tested whether customers could afford to pay off their debts even at higher interest rates before approving home loans.
However, bank executives said some customers were nearing those tested thresholds. Bradley Fordham, Santander UK’s mortgage director, said: “We’ve affordability stress-tested at a higher interest rate … at about 6% … at the time of application. We’ve understood that customers can bear a higher interest rate and that seems to be bearing out at this moment in time.”
Dozens of UK banks, including HSBC, Lloyds Banking Group, NatWest, Santander and Nationwide, recently signed the chancellor’s mortgage charter, agreeing to more readily offer forbearance options such as mortgage term extensions and interest-only payment periods to support struggling borrowers.
But Jordan said interest-only payment plans would no longer provide much relief for borrowers if rates pushed beyond 6%.
He said extending the term of a mortgage – referring to the number of years over which a customer repays their debt – would mean Nationwide’s customers would see their monthly payments increase by £134 rather than £250. “It takes about £100 off the increase,” Jordan said. Converting to interest-only payments would also be beneficial for some borrowers and “would more than offset that increase”.
“And that remains true until you get to [interest rates] somewhere between 6.25% and 6.5% – so that might be a kind of tipping point at which options like interest-only won’t be sufficient to offset the increase in payments,” Jordan added.
While it was not immediately clear how much strain that could put on borrowers, lenders were widely expected to start putting aside more money in the second quarter to protect themselves against potential defaults.
“Currently, we would expect provisions to rise very slightly in line with arrears as customers move into different stage,” Santander’s Fordham said.
