Additional Piece: The Impact of Rising Mortgage Rates on the UK Economy
Introduction:
Rising mortgage rates have been a cause of concern for homeowners in the UK, as the cost of living continues to increase. Recent data and market expectations suggest that the Bank of England base rate is set to rise from 4.5 percent to around 5.75 percent in the next year. This increase in interest rates has led to banks withdrawing and revaluing mortgage products, causing mortgage costs to surge. In this article, we will explore the potential impact of higher mortgage rates on the UK economy and delve into the challenges faced by homeowners as they navigate through this period of uncertainty.
1. The Persistence of UK Inflation:
One of the key factors contributing to the anticipation of rising mortgage rates is the persistence of inflation in the UK. In comparison to other countries, UK inflation has proven to be more stubborn. Higher-than-expected wage and price growth data have prompted financial markets to project a substantial increase in the Bank of England base rate. The effects of this anticipated rate hike are already being felt by homeowners, as banks have started to increase the cost of mortgage products.
2. Strained Households and the High Cost of Living:
The high cost of living has put considerable strain on UK households, and higher mortgage costs will only exacerbate the situation. With headline inflation at 8.7 percent, which still outpaces wage growth, and food price inflation even higher, households are finding it increasingly challenging to make ends meet. The Resolution Foundation estimates that since the rate hike cycle began in December 2021, 4.2 million households have experienced an average annual repayment increase of £1,500. This financial burden is expected to worsen next year when the remortgage of homes could face an average increase of £2,900 in annual payments. These rising costs will undoubtedly tighten budgets and lead to a slowdown in consumer spending across the economy.
3. Impact on the Housing Market:
The surge in mortgage rates is likely to have a significant impact on the UK housing market. For homeowners who have grown accustomed to low rates over the past decade, the sudden increase in borrowing costs can be a shock to their financial stability. As budgets tighten and borrowing becomes more expensive, many first-time buyers may reconsider their plans, leading to a decrease in housing market demand. This decrease in demand, coupled with the higher borrowing costs, could potentially result in a further decline in home prices.
4. The Effect on the Economy:
The impact of higher mortgage rates on the overall UK economy is a topic of concern. Approximately 1.3 million people have a fixed-rate mortgage agreement due within 12 months from July 1, accounting for around one-sixth of all households with mortgages. While this proportion may seem manageable, it is essential to consider the broader implications. Furthermore, limited housing supply in Britain will exert upward pressure on prices, which may not necessitate a substantial increase in rates as initially projected by the market. Therefore, while a crisis is unlikely, the economy may experience a period of instability and slower growth.
5. Political Concerns and Government Support:
Higher mortgage costs have become a political concern for the government, especially with elections on the horizon. However, Prime Minister Rishi Sunak has ruled out direct support for mortgage holders, stating that higher mortgage rates are different from the unpredictable events of the pandemic and rising energy prices that warranted government assistance. While mortgage rate hikes will undoubtedly impact homeowners, providing financial support would hinder the process of absorbing demand through increased borrowing costs. The Bank of England relies on the concept of higher borrowing costs to control inflation.
6. Helping Mortgage Holders:
Despite the absence of direct government support, banks can play a role in helping households most at risk of distress. They can offer temporary adjustments to mortgage terms and provide access to budget advice to mitigate the impact of higher mortgage costs. This approach would enable banks to assist homeowners without impeding the necessary process of higher borrowing rates to curb inflation. Ultimately, the best way to support mortgage holders and alleviate their financial burdens is for the Bank of England to effectively reduce inflation.
Conclusion:
In conclusion, the increased mortgage rates in the UK have significant implications for homeowners and the broader economy. As inflation persists and market expectations of rate hikes rise, the burden on households will continue to grow. The cost of living remains high, and the anticipated increase in mortgage costs will undoubtedly tighten household budgets. The housing market may experience a slowdown as demand decreases due to higher borrowing costs. While the government has ruled out direct support for mortgage holders, banks can provide assistance through temporary adjustments to mortgage terms and budget advice. The path to financial stability lies in effectively reducing inflation, and the Bank of England’s next rate hike is crucial in demonstrating its commitment to tackling this issue.
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As the riots in the US banking sector in March demonstrated, higher interest rates affect economies in a way that is neither smooth nor linear. Indeed, central bankers have been wary of breaking things down, having rapidly increased the cost of credit over the past two years to cope with sticky prices. Given the time it takes to affect those who set loans at lower rates, much of the pain is yet to come. Nowhere is this more true than in the UK, where concerns are mounting about the next blow to homeowners.
UK inflation has proven to be more persistent than in peer countries. Following higher-than-expected wage and price growth data, financial markets now expect the Bank of England base rate to rise from 4.5 percent today to around 5.75 percent for the next year. end of the year. In turn, banks have aggressively withdrawn and revalued mortgage products. On Monday, two-year fixed-rate mortgages rose above 6 percentthe highest since December, in the wake of the infamous “small budget.
Higher mortgage costs will add salt to the wounds of households already strained by the high cost of living. Headline inflation is 8.7 percent, still above wage growth, and food price inflation is even higher. He Resolution FoundationOne think tank estimates that 4.2 million households will have experienced an average annual repayment increase of £1,500 since the BoE’s rate hike cycle began in December 2021.
Next year, the remortgage of homes could face an average increase of £2,900 in annual payments. This will be a blow to homeowners accustomed to low rates over the past decade. Budgets will tighten significantly, and consumer spending across the economy will slow. Many first-time buyers will reconsider their plans, and home prices could fall further as high borrowing costs reduce demand.
How bad could this be for the economy in general? TOAbout 1.3 million people have a fixed-rate mortgage agreement due within 12 months of July 1, or about one-sixth of all households with mortgages. The proportion of homeowners holding mortgages has dropped in recent decades to around 30 percent, so the pain may be more contained. Rates may not need to rise as much as markets expect either, and limited housing supply in Britain will keep some upward pressure on prices. Therefore, a crisis rather than a general collapse is more likely.
Higher mortgage costs will remain a political concern for the government ahead of next year’s elections, but Prime Minister Rishi Sunak has rightly ruled out direct support for mortgage holders. Higher mortgage rates are not the same as the unpredictable, systemic events of the pandemic and rising energy prices, which justified government support. The increase in mortgage payments will be pronounced, but the rules force lenders to make sure new borrowers are aware of the risks of rising rates.
Financial support would also be wrong in terms of monetary policy. The BoE is based on the notion that increasing the cost of borrowing will absorb demand. The delivery of public money prevents this hard but necessary process. Rates would have to rise further to stamp out inflation, and more borrowing could further boost gilt yields. However, that doesn’t mean mortgage holders shouldn’t get help. Banks should continue to explore how they can help households most at risk of distress, for example through temporary adjustments to the terms of their mortgages, along with access to budget advice.
Ultimately, the best way to support mortgage holders is for the BoE to reduce inflation. You have a chance to show that you are getting a grip on your meeting on Thursday, when another quarter-point rate hike is expected. Unfortunately for homeowners, things will have to get worse before they get better.
https://www.ft.com/content/03835827-a804-41b2-95db-1b4bfa77218d
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