Is UK on the edge of a mortgage market meltdown?

Soaring mortgage costs in UK are fuelling fears among homeowners, investors, charities and policymakers about the growing strain placed on borrowers, but lenders have so far sounded broadly sanguine about their customers’ ability to cope.

A 50 bps rise in the Bank of England base rate to 5% on Thursday, twice the expected 25 bps rise and the 13th hike in a row, is likely to test that confidence, however, especially as consumers are already struggling with stubbornly high prices for food, fuel and essential services.

Here are some of the tools UK banks are using to help customers navigate the turmoil, and views on whether those actions will be enough to prevent substantial harm to Britain’s 1.7 trillion pound ($2.2 trillion) housing market.

WHY HAVE UK MORTGAGE RATES SOARED?

There are two main types of mortgage rate – variable and fixed. Variable rate mortgages track the Bank of England base rate, so whenever the benchmark is raised, this is automatically passed on to those customers.

Fixed rate mortgages lock in a particular interest rate upfront, usually for a period of two to five years. The pricing is based on where markets think BoE rates will go over that fixed period, with lenders referring to interest rate swap markets that track investor bets on future rates.

A run of data showing stickier-than-expected UK inflation has led markets to bet that BoE rates will stay higher and for longer. This has been reflected in swap markets.

The two-year and five-year swaps hit 5.99% and 5.26% respectively on Thursday, Refinitiv Eikon data showed – levels not seen since the chaos that followed September’s mini-budget. Banks say they have to reflect these market moves to avoid pricing mortgages at a loss. ,

WHO IS AT RISK?

Banks say only small numbers of customers are experiencing financial strain or falling behind on mortgage repayments, but they are paying particularly close attention to lower income households who have been hit hardest by high inflation.

One reason for customers resilience so far is that most are still in work and able to pay their mortgages even if their income has been squeezed. British unemployment has remained low, but any significant uptick in this could be a game-changer.

Of around 9 million outstanding residential mortgages, 800,000 are due to come off fixed-rate deals in the second half of 2023, data from trade industry group UK Finance shows. A further 1.6 million households will come off fixed rates in 2024.

Nicholas Mendes, mortgage technical manager at mortgage broker John Charcol, told Reuters industry data showed more homeowners opting for product transfers with an existing lender rather than shopping around. So doing will help some avoid fresh affordability checks they might fail, Mendes said, potentially masking the full extent of a growing affordability problem.

Polling from debt charity StepChange published on Thursday showed 45% of mortgage borrowers – equivalent to 6.9 million UK adults – have found it difficult to keep up with bills and credit commitments.

There are signs cash-strapped Britons are turning to higher cost, unsecured credit to make ends meet, with 343.8 million credit card transactions recorded in March – 4.9% higher than in March 2022, UK Finance data showed.

The total spend of 20 billion pounds was 8.4% higher than March 2022, with outstanding credit card balances up by 9.6% over the year to March.

WILL THERE BE MASS REPOSSESSIONS?

Some 750 homeowner mortgaged properties were repossessed in the first three months of this year, UK Finance has said, up 50% on the previous quarter but well below levels seen in previous crises like the early 1990s housing crash.

A further 410 buy-to-let properties were repossessed in same period, up 28% quarter-on-quarter.

The number of homeowners in arrears accounts for around 0.8% of outstanding mortgages, but the number is rising. There were 76,630 homeowner mortgages in arrears of 2.5% or more of the outstanding balance in the first quarter of 2023, 2% greater than in the previous quarter.

Banks say mass repossessions are unlikely this time around, due to tougher affordability tests, flexible forbearance options for customers, and a culture shift in banking forced by years of chastening scandals after the 2000s global financial crisis.

WHAT ARE BANKS ALREADY DOING TO HELP CUSTOMERS?

Major banks have been offering help to customers they identify may need support, such as financial health checks, temporary payment holidays, moving customers onto interest-only repayment plans for a short time, or extended loan terms.

WHAT COULD THE GOVERNMENT ASK THE BANKS TO DO?

Britain’s finance minister Jeremy Hunt is due to meet bank bosses on Friday to discuss how they can help homeowners cope.

Hunt has said the government will not offer significant financial help and that mortgage lenders must live up to their commitments to help borrowers struggling with higher interest rates.

Critics say banks could do much more, particularly as they have passed rate rises through to savers much more slowly than mortgage rates have risen. During the pandemic, the government mandated banks to offer repayment breaks, but bankers warn similar reliefs now could have unintended consequences.

The opposition Labour party laid out plans on Wednesday that it said would help curb mortgage costs, including requiring lenders to allow borrowers to lengthen their mortgage period.

Longer fixed terms could be an answer, some experts say, although they run the risk of locking customers into bad deals. Others say there could be a return of some form of “Help to Buy” scheme offering state assistance for first-time buyers.

“They could get the banks to start to finally mirror the United States practice where most mortgages are fixed rate long-term,” Roger Gewolb, founder of the Campaign for Fair Finance, told Reuters.

“These simple measures imposed by government would make the whole mortgage market a calmer place.”