Heavily mortgaged generation to pay price for UK rate crisis

The events of the past week have been astounding, as Britain has gone from trudging through difficult financial times to full-scale intervention by the Bank of England.

The UK economy doesn’t exist in isolation and much of the rest of the world is also being hit by the storm of inflation and a strong dollar, but it’s awesome to shoot yourself in the foot so hard that you trigger your own mini-financial crisis. .

It tends to pay off if you can keep your head when all the commentators around you are losing theirs, so I’ll go easy on the hyperbole and let the list speak for itself: sterling gilt skyrocketing returns , fears of the collapse of pension funds and mortgages. chaos.

Kwasi Kwarteng’s nonchalant statement contained debt-financed tax cuts and big spending measures in a push for growth, but it came out of a budget and no OBR report.

The debt-financed tax cuts from Kwasi Kwarteng’s mini-free budget are not the only culprits for the situation we find ourselves in: the Bank of England’s muddled over the past year must also take some of the blame.

However, as disappointed as some corners of the markets were by last week’s 0.5 percentage point increase in the base rate to 2.25 percent, compared with a larger 0.75 point increase Federal Reserve percentage rates, it’s hard to see how this would have happened without the events on Friday.

Kwasi’s growth ideas may be the kind of thing we need to pull Britain out of its post-financial crisis doldrums, but the problem was delivery.

Announcing such a barrage of tax cuts and spending outside of a budget, or even a Fall/Spring Statement, was unorthodox; doing it while debt financed and without an OBR report along with it was foolish.

Combine that with 9.9 percent inflation and looming questions about the Bank of England’s monetary policy performance, and even its independence, and you have a recipe for his bold plans to fail en masse.

Trust is hard to earn and easy to lose and much faith in Britain’s prudent ability to manage its finances has been wasted.

Back in the days of the financial crisis, I used to chide one of our reporters for his excessive use of the word carnage, but the last few days have felt pretty carnageous.

This culminated in the intervention of the Bank of England yesterday, with an emergency bond buying ‘gold market operation’ which we explain here.

The Bank will buy long-term UK government bonds to try to stabilize the market and prevent yields from skyrocketing (government bonds are meant to be the boring, stable part of the market, remember).

The catalyst for this is reported to have been fears that pension funds would collapse, as final salary schemes invested in complex derivative-linked liability-linked mutual funds faced huge cash demands.

The fallout from fiscal spree has seen the pound plummet, UK lending rates soar and the base rate is now forecast to rise as high as 6%.

The fallout from fiscal spree has seen the pound plummet, UK lending rates soar and the base rate is now forecast to rise as high as 6%.

Hopefully the Bank’s action will work and will also help stabilize the mortgage market, where borrowers have seen rates soar, adding hundreds of pounds a month to payments for those who are in the unfortunate position of needing to repay. mortgage.

I’ve talked to borrowers this week who are facing a £400 or £500 increase in their monthly bills as they come off cheap fixed rate deals they signed up for two to five years ago and are facing much higher rates now.

To put this in context, at the beginning of the year Nationwide had a five-year fixed rate of 1.49 percent, following its pricing review this week, the building society’s five-year fixed rates start from the 5.19 percent.

On a £250,000 mortgage over 25 years, that’s the difference between paying £999 a month and £1,489, aka £490.

Many of those whose fixed mortgages end anytime in the next two years are very concerned about the payment shock they face, but the most pressing scenario is for those whose deals end in the next three to six months.

Not only are they looking down the barrel of much higher rates, but they’ve also seen swaths of lenders scrap deals or pull out of the market for new business this week, creating a sense of panic.

No need to panic, as we explain in our What to Do If You Need to Get a Mortgage guide, the brokers we’ve spoken to this week assure us that deals are available, but add that rates are changing rapidly and call volumes they are running very high.

Normally, when the fear indicator spikes, that’s the worst time to try to do anything, but for those who need to insure a mortgage, the problem is that there are also forecasts that the Bank of England may now need to raise the base rate to 6.25 . percent

Whether I could ever get there before the severe financial pain inflicted on people stuck in the raises is something I would wonder. But I also wouldn’t have predicted rates to rise as fast as they have this year, and I spent years advocating for rate hikes when the bank stalled.

Homes are more expensive than ever compared to earnings, yet the message from many in the financial industry has been that this doesn't matter as mortgage rates are low;  now they are spiraling and the borrowers have been trapped.

Homes are more expensive than ever compared to earnings, yet the message from many in the financial industry has been that this doesn’t matter as mortgage rates are low; now they are spiraling and the borrowers have been trapped.

Borrowers have every right to feel bad around here, having been assured for years by central banks that when rates do rise it will be smooth and gradual.

Instead, it turns out that the climb was delayed too long and then the hikes were delivered brutally and quickly.

Borrowers spent years being reassured by central banks that rates would rise gently and gradually. Instead, it has been brutally and rapidly

I’ve spent years writing about mortgages and house prices and have regularly posted updated versions of the chart above, which shows house prices vs. wages.

It illustrates how, even after the financial crisis, property values ​​never returned to their long-term average and how the ratio has skyrocketed since 2012.

Houses are more expensive than ever compared to earnings and it has become abundantly clear that unless wages start to rise substantially this would be a problem when interest rates start to rise.

Others regularly voiced this same concern, but many in the financial industry have resolutely dismissed it as a minor issue.

The message from those supposedly informed has been that this doesn’t matter, since mortgage rates were low and monthly payments are affordable; now they are skyrocketing and borrowers are getting hit.

Will we see any bank, building society, other financial firms, or even regulators raise their hands and say, ‘sorry, we were wrong’? I seriously doubt it.

This will cause another bout of intergenerational inequality, as it is the heavily mortgaged generation of homeowners in their 40s, 30s, and 20s who are facing the pain.

That person in the example above with the £250,000 mortgage could be someone making £60,000 a year. They are looking at nearly £6,000 extra a year in mortgage payments and that will eat up £10,000 a year before tax out of their income just to cover the added costs of staying in their home at higher rates.

This chart by Sky's Ed Conway shows affordability-adjusted rates in red, illustrating that due to higher house prices, pay rates compared to today's 6% lead to a similar mortgage burden as in the beginning from the 1990s to double digits.

This chart by Sky’s Ed Conway shows affordability-adjusted rates in red, illustrating that due to higher house prices, pay rates compared to today’s 6% lead to a similar mortgage burden as in the beginning from the 1990s to double digits.

I know there will be many reading this column who remember the pain of homeownership in the early 1990s and dismiss complaints about 5 percent mortgage rates with a wry look.

However, house prices were lower compared to wages then and if you adjust for affordability, it takes much lower rates to cause the same pain now.

East Sky’s Ed Conway affordability-adjusted fee chartbased on research by BuiltPlace’s Neal Hudson, illustrates that point, showing that rates of 6 percent today would generate a mortgage burden similar to the double digits of the early 1990s.

Let’s hope the Bank of England and the government get this situation under control quickly, in the meantime This is Money will keep you up to date on what you need to know and what it means for you.

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