Mortgage deals are being pulled by banks and building societies after the fall in the pound fuelled expectations of an emergency interest rate rise. So whether you are a first-time buyer or looking to remortgage what does the mortgage market turmoil mean for you?
What has happened?
Hundreds of mortgage deals have been withdrawn by banks and building societies as they digest the fallout from last week’s mini-budget which has altered the outlook for interest rates.
The country’s largest mortgage lender Halifax, for example, has withdrawn its fee-paying mortgage products where borrowers paid an upfront fee to secure a lower fixed interest rate.
Halifax is not alone. On Tuesday morning there were 3,596 residential mortgage deals available, 284 fewer than before the sharp fall in the value of the pound on Monday morning, according to data firm Moneyfacts. At the end of last year there were 5,315 products.
“The future is certainly looking bleak when the biggest lender in the UK pulls a big selection of their products on offer,” says Jamie Lennox, a director at Dimora Mortgages. “The uncertainty around the risk of an emergency rate rise is likely to see other lenders withdrawing products or increasing rates dramatically until they know the extent of how this all pans out.”
Why are lenders pulling deals?
In short the outlook for interest rates has changed and lenders need to ensure their mortgage products are profitable, as well as affordable for customers. Experts said a rise in the cost of long-term borrowing due to the recent upheaval meant the cost of offering new deals had risen.
Lenders price their mortgage interest rates against the Bank of England base rate which increased to 2.25% last week. Until recently financial markets thought the base rate would get to 4.5% by next spring.
However, the reaction to the government’s tax cutting budget means analysts think it will have to get to nearly 6% to restore investor confidence in the UK economy and get inflation under control.
“Major mortgage players are hauling in the sails after the wind changed,” said Sarah Coles, a senior personal finance analyst at Hargreaves Lansdown. “The dramatic overnight hike in market expectations of future rates has ramped up the cost of doing business, and lenders are taking a break to reassess and reprice.”
What does it mean for my mortgage?
It depends what type of deal you are on. Most borrowers are on fixed-rate mortgages, so are insulated from the upheaval for the time being. However, the upshot of all this is less choice and higher borrowing costs when you do need to find a new deal.
Someone who fixed at 2% two years ago could be looking at a remortgage rate at 5% by next week. If they had a £200,000 mortgage over 25 years, that’s a rise in monthly payments from £848 to £1,169 – or £321.
About a fifth of households are on a variable rate – either a tracker mortgage, where the rate you pay is explicitly linked to the Bank base rate, or their lender’s standard variable rate (SVR). Amid the announcements that products were being withdrawn Halifax and Scottish Widows Bank said their SVR was going up by 0.5% to 5.74%.
Higher mortgage costs are also bad news for first-time buyers who may have to lower their budget in order to manage repayments on the loan.
If you have six months or less to run on a fixed-rate mortgage it might be wise to start shopping around for a new rate. Given the market turmoil, you may want to talk to a broker who understands the fast-changing mortgage sector outlook and can track down the best rates.
Imran Hussain, a director at Harmony Financial Services, predicted mortgage products will “get chopped and changed quicker than we can all keep up”. “The mortgage market was already hectic and now it’s going haywire,” he said.
