The triple threat of rampant inflation, rising interest rates and plunging consumer finances looks set to hit high-loan-to-value mortgages hard, says Bloomberg Intelligence.
The 1.5% leap in the two-year swap curve rate for UK banks’ mortgage pricing during Prime Minister Liz Truss’s short tenure has all but reversed, “relieving some of the considerable pain” in the mortgage market where rates had spiked to 7%, says a report from the group, called UK Mortgage Pricing Peak? 95% LTV Risk Remains.
It adds that about two million households are due to refinance to a new deal between the fourth quarter of this year to the end of 2023. With 15% falling due in the final three months of this year, “monthly payments look set to double for many, with 6% rates looming, notably for the higher loan-to-value buckets”.
The survey says: “This seismic leap in pricing will disproportionately affect younger generations, exacerbating the painful wealth and ownership divide.
“Even as banks shift clients toward longer-duration offers, to add to visibility and lower mortgage churn, we note that the five-year swap rate is currently in excess of 5% as well.”
It adds that “UK housing market dynamics are changing quickly”, with mortgage price increases likely near a peak as the Bank of England looks set to raise interest rates to more than 4% by early 2023 and a slowdown in approvals and hit to affordability feed through to lower property values and activity.
Though the 3% rate hike mortgage stress test – abandoned since August – should have added some support to buyers, standard variable rates above 5% now mean that many will fail to pass affordability checks, the study points out.
It highlights that Nationwide reported a 0.9% decline in house prices in October, trimming year-over-year gains to 7.2%.
Bloomberg Intelligence senior industry analyst (banks) Jonathan Tyce says: “A decline in UK swap rates and a return of liquidity to the sub-90% loan-to-value echelons of the mortgage market should drive offered rates lower in the coming weeks.
“We remain concerned that with a 5 to 10% retreat in house prices very possible in 2023 [Lloyds’ base case is 8%], mortgage supply to the 90% and 95% LTV buckets will disappear, or price higher, absent a new government guarantee.”
The report comes as the BoE lifted the base rate by 75 basis points to 3% today, the biggest since 1989 and the eighth time the bank has hiked rates since December. In November, the base rate was just 0.1%.
The move also follows moves by new Chancellor Jeremy Hunt, who last month reversed the vast majority of tax cuts announced in September’s mini-budget, although the stamp duty cut for house purchases remains.
The mini-budget led to more than a thousand products being pulled as lenders worked out how to reprice loans as the cost of debt for the government and companies lifted on international money markets, following former Chancellor Kwasi Kwarteng’s tax-cutting fiscal event.
