Increasing lending rates cause a significant mortgage crisis for Brits.

LONDON — Experts have warned that U.K. borrowers are on the brink of an economic crisis as mortgage costs rise and available mortgage products decrease.

New data from financial information company Moneyfacts shows that the average two-year fixed rate on a residential property in Britain has reached its highest level since December 1, 2022, at 6.01%. This increase follows the government’s market-shaking mini-budget, with two-year fixed rates last above 6% in November 2008.

In addition to rising costs, there has been a decline in the number of residential mortgage products available, dropping from 5,264 on May 1 to 4,683.

Martin Stewart, director of mortgage advisory firm London Money, describes the past nine months as “seismic” for the mortgage and housing sector, comparing it to the financial crisis but with different causes. Stewart emphasizes the dysfunctional and broken state of the market, with advisors waiting in queues along with 2,000 others to secure mortgages that may no longer be available when their turn comes. He notes that interest rates have significantly increased, with rates starting around 5% compared to 1% or lower two years ago.

The average rate for a five-year mortgage currently stands at 5.67%, according to Moneyfacts.

Prime Minister Rishi Sunak, when questioned about support for struggling households, stated that the government’s priority is tackling inflation and sticking to its plan.

HSBC and Santander are among the banks that have temporarily withdrawn mortgage products due to market uncertainties. The increase in short-term U.K. government bond yields, with the 2-year yield reaching a 15-year high, has contributed to the changing mortgage landscape.

Markets currently anticipate interest rates peaking at nearly 6%, up from the current 4.5%. A strong labor market report in mid-June heightened rate expectations, and the Bank of England is set to announce its latest interest rate decision following its 12th consecutive hike in May.

U.K. inflation continues to be one of the highest among developed economies at 8.7%, with central bank officials warning about the potential for lasting effects like increased prices and wages.

Viraj Patel, senior strategist at Vanda Research, believes that the worst of the mortgage crisis is yet to come. Over 50% of households have yet to remortgage at higher rates, putting stress on the housing market and broader economy. Patel expects the adverse impact of higher mortgage costs to be felt in the second half of 2023, emphasizing the importance of the Bank of England and markets being aware of the time delays associated with monetary policy.

In January, the U.K.’s Financial Conduct Authority cautioned that over 750,000 households were at risk of default due to rising rates.

Patel also points out the risk of defaults, but highlights the better oversight of the Bank of England. He expresses greater concern about the second-round effects, such as reduced consumer spending and potentially excessive non-housing credit.

Martin Stewart of London Money notes that borrowers are seeking advice earlier than usual, displaying a range of emotions from despair to pragmatism. He paints a grim picture, describing the situation as heading towards an abyss where the consequences of over-leveraging, insufficient savings, and struggling businesses are starting to pile up. Despite positive economic forecasts, Stewart believes that the personal financial decisions of borrowers will have a macro impact and could contribute to the onset of a recession.

— CNBC’s Ganesh Rao contributed to this report