What The Hell's Going On With Mortgages? Your Very Simple Guide

It all depends on when you might have signed a mortgage deal.
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Residential living in South-East London, UK

After the pound dropped rapidly in value, worries about what this could mean for the housing market soared.

It’s no secret that chancellor Kwasi Kwarteng’s so-called “mini” budget with £45 billion worth of tax cuts has not exactly landed well with investors all over the world.

Now the Bank of England has tried to step in, to mitigate the damage to the UK market by buying government debt and considering increasing interest rates.

But what does this have to do with your mortgages?

Here’s what you need to know.

How does this emerging currency crisis affect the housing market?

The Bank of England – which is tasked with controlling inflation – has confirmed it would “not hesitate” to raise interest rates, to help increase the value of the sterling, and is already buying government debt, to bringing inflation down.

But, this has not fixed the problem completely, just given the government some breathing space.

In the meantime, the market has seen mortgage providers withdraw various offers from sale as lenders are left uncertain about how to accurately price their products. 

Nearly 300 deals were pulled between Monday and Tuesday last week by banks and building societies after the pound dropped off – this was the equivalent of a 7% drop in the number of mortgage deals available.

Fewer deals mean interest rates will increase to rates not seen since before the global financial crisis of 2008.

Interest rates are expected to soar to nearly 6%, from 2.25% right now.

Considering the amount people have been borrowing, due to the high prices for housing in the UK and stagnant wages, these small rises can lead to unaffordable repayments.

What does this mean for first-time buyers? 

First-time buyers (and remortgagers) are the ones who will struggle most in this situation.

Some lenders have withdrawn their mortgages to new customers until the market levels out.

The special deals and rates will have vanished, to be replaced by pricier alternatives with higher interest rates.

This – along with the cost of living crisis – may push first-time buyers out of the housing market.

 

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 What does this mean for those who already have mortgages?

The government will not provide any direct intervention to anyone with a mortgage, as it did with energy bills.

But, if you already have a deal agreed with a lender and completed your mortgage application, it should still stand and so you should not have to pay any extra on your repayments.

If you are part-way through a fixed-rate mortgage deal that rate cannot be changed until that deal runs out.

Those with a variable rate, either a tracker mortgage linked to the Bank base rate or a lender’s standard variable rate, are likely to see an uptick in their payments though.

For instance, Halifax and Scottish Widows Bank have already confirmed their variable rate is increasing by 0.5% to 5.74%.

If you’re close to paying off your mortgage...

You could consider making overpayments to reduce the size of your mortgage and reducing the overall interest you pay. 

There are mortgage advisers out there who would be able to give you specific advice for your situation.

So, how worried should we be?

There is certainly a sense of panic around the housing crisis.

Even financial expert Martin Lewis, from MoneySavingExpert.com, admitted “it’s very worrying”, tweeting: “The mortgage market turmoil right now is unprecedented.”

He noted that for every £100,000 of mortgage, you’ll “pay roughly £600 a year more for each 1% pt interest rate rise”.

Yet, there are hopes that the withdrawals are just temporary.

Economist Tony Yates joined the chorus of bewildered government critics on Tuesday, telling the BBC’s Outside Source programme on Tuesday: “I really don’t understand it.

“It seems like they [Downing Street] have departed from reason and evidence in this hope that the tax cuts will generate an improvement in growth and bring tax revenues on stream, quickly.”

He predicted the Bank is likely to vote for tighter interest rates – and this was reflected in the expectation in the markets, and activities of lenders who are repricing mortgages.

But, Yates noted, this all puts people “with not much money but a big mortgage in great difficulty”.

Housing charity Shelter has also called for government action, warning “people will lose their homes” without intervention.