During a week where the entire nation is consumed by panic over interest rates, the most vocal individuals are the mortgage enthusiasts.
Nearly every workplace, family, and social circle has one. That person who constantly goes on about signing up for a 10-year fixed-rate mortgage at just over 1 percent long before the chaos of Kwasi Kwarteng’s “mini” Budget. Unfortunately, if you’re reading this, that person is probably you.
Less likely to speak up are those whose fixed-rate deals are nearing expiration as interest rates continue to rise, bringing anxiety levels up with them.
Mortgage enthusiasts may claim to have seen it coming, but the truth is that it’s mostly a matter of luck when deals start and end. However, for the hundreds of thousands of households reaching the end of their deals, mortgage rates starting with a 6 or 7 will lead to significant increases in monthly expenses.
If your agreement still has a few years left, don’t get too comfortable. While you may not be making lifestyle adjustments to cope with increased payments now, your friends and colleagues likely are. And eventually, all borrowers will experience the pain of higher repayments, which could potentially impact the Conservative Party’s chances in the next election.
Amidst this week’s drama of rising mortgage rates, with HSBC increasing rates twice in one week and other lenders following suit, polls indicate that twice as many people blame the government for the increased costs compared to those who attribute it to global crises like the war in Ukraine or the effects of the pandemic.
Some have called for Downing Street summits with mortgage lenders and even suggested Covid furlough-style payouts to support struggling borrowers. However, the purpose of rate hikes is to curb inflation by putting pressure on people’s finances.
As then-Chancellor John Major stated in 1989 when rates were heading towards 15 percent, “If the policy isn’t hurting, it isn’t working.” But such hikes are a blunt instrument. Mortgage enthusiasts and those who have paid off their mortgages can still spend lavishly, while the burden falls on those whose fixed-rate deals have expired. This randomness can create personal and political unpleasantness.
Overall, mortgage lenders have acted commendably during the pandemic by offering assistance to distressed borrowers. Regulators have made it clear that this support must continue. However, even if rates come down in the future, we likely won’t see mortgage rates starting with a 1 or 2 again. Those looking to refinance their home loans face a dilemma. Should they take the risk of a tracker rate or a short-term fix in the hope of locking in a lower rate later?
Many people feel woefully unprepared to make a decision that could significantly impact their family’s finances for years to come. This is particularly true for millennial couples burdened with larger mortgages and childcare expenses. While brokers can find the best deals on the market, they can’t make the decision for you. Opting for a five-year fix at current levels means being stuck with higher repayments for longer, but many borrowers crave certainty and protection against further increases.
In the UK, the value of our homes is closely tied to our self-worth. This current situation is politically toxic for the Tories, who are traditionally seen as the party of homeownership. From Right to Buy in the Thatcher era to Help to Buy in recent years, owning a home has symbolized success and financial prosperity, even for those who took on significant debt to purchase their property.
Since the financial crisis, average pay growth has been minimal in real terms, while average house prices have soared. This has made property owners feel considerably wealthier. Seeing neighboring properties advertised for large sums on platforms like Rightmove boosts morale and helps alleviate the strain of expensive mortgages. However, as more fixed-rate deals expire in the next 18 months, the impact of higher rates will inevitably lead to a decline in house prices.
This is a terrible timing for a government heading into a general election. However, despite the concerns felt by borrowers, those who rent privately are even more anxious. In April, letting agent Foxtons reported having 97,000 tenants vying for just 2,000 available rental properties. Annual rent increases have reached record highs, making it even more challenging for the 5.5 million UK households renting to achieve property ownership. So while higher mortgage payments may sting as the era of cheap money comes to an end, homeowners still have reasons to be grateful.
Claer Barrett, the FT’s consumer editor, is the author of ‘What They Don’t Teach You About Money.’ [email protected]
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