Heavily-mortgaged generation will pay the price for UK’s rate crisis

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

The UK economy isn’t an isolated one and much of the rest of the world is also ravaged by the inflation storm and the strong dollar, but it’s impressive to shoot yourself in the foot to trigger your own mini-financial crisis.

It tends to pay off if you can keep your head up when everyone around you loses theirs, so I’ll take it easy on the hyperbole and let the list speak for itself: crashing pounds, skyrocketing gold yields, fears of pension fund collapse and mortgage chaos.

The debt-funded tax cuts of Kwasi Kwarteng’s free-running mini-Budget aren’t just responsible for the predicament we find ourselves in – the confused Bank of England of the past year must also be taking on some debt.

While some corners of the markets were impressed by the 0.5 percentage point rise in key interest rates last week to 2.25 percent, compared to the Fed’s larger 0.75 percentage point rise, it’s hard to see how this would have happened without the events of Friday.

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

It was unorthodox to announce such a bombardment of tax cuts and out-of-budget spending, or even a fall/spring statement; to do this while being financed with debt and with no OBR report next to it was foolish.

Put that in line with inflation at 9.9 percent and the questions looming over the performance of the Bank of England’s monetary policy – and even its independence – and you have a recipe for your daring plans to fail massively.

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

During the time of the financial crisis, I used to tell one of our reporters that he used the word carnage too often, but the last few days I felt pretty carnage

This culminated in the Bank of England organizing that intervention yesterday, with an emergency buyout of a ‘gilded market operation’ which we explain here.

The Bank will buy long-dated UK Treasuries to try to stabilize the market and stop rising interest rates (governments are meant to be the dull, stable part of the market, remember).

The catalyst for this has reportedly been fears of pension fund collapse, as final pay plans invested in complex, derivative-related, liability-driven mutual funds faced massive withdrawals.

Hopefully the Bank’s action will work and also help stabilize the mortgage market, where borrowers have seen rates rise – adding hundreds of pounds a month to payments for those in the unfortunate position of having to re-mortgage. shut down.

I spoke to borrowers this week who are facing a £400 or £500 increase in their monthly bills as they take out cheap fixed-rate deals that closed two or five years ago and are now facing much higher rates.

To put this in context, Nationwide had a five-year flat rate of 1.49 percent at the start of the year, after the price review this week, the construction company’s five-year fixes start from 5.19 percent. On a £250,000 mortgage over 25 years, that’s the difference between paying £999 a month and £1,489 or £490.

Many of those whose mortgages expire at some point 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 staring at the barrel of much higher rates this week, but they have also seen a large number of lenders abandon deals or pull out of the new business market this week, sparking a sense of panic.

There’s no need to panic, as we explain in our What to Do When You Need a Mortgage Guide, brokers we spoke to this week assure us there are deals available, but add that rates change quickly and that the ringer volume runs very high.

Normally it’s the worst time to try anything when the fear meter is cranked up, but for those in need of a mortgage, the problem is that there are also forecasts that the Bank of England may now need to raise the key rate to 6.25 percent .

Whether it could ever really come to that before the severe financial pain that people have inflicted increases is something I would doubt. But I also never expected interest rates to rise as quickly as they have this year — and I’ve argued for rate hikes for years when the bank ground to a halt.

Borrowers have every right to feel bad about this, as they have been reassured for years by central banks that if interest rates were to rise, it would happen gently and gradually.

Instead, it turned out that the move was delayed for too long and the walks were delivered brutally and quickly.

I’ve written about mortgages and home prices for years, and have regularly posted updated versions of the chart above, showing home prices versus wages.

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

Homes are more expensive compared to income than ever before and it is abundantly clear that unless wages rose substantially, this would become a problem when interest rates rose.

Others regularly voiced the same concern, but it has been firmly dismissed as a non-issue by many in the financial sector.

The message from those who were supposedly in the know was that this doesn’t matter as mortgage rates were low and monthly payments are affordable – now they are rising and borrowers are being hammered.

Will we see banks, building societies, other financial institutions or even the regulators raise their hands and say, ‘Sorry, we were wrong?’ I seriously doubt it.

This will set off another onslaught of inequality between generations, as it is the heavily mortgaged generation of homeowners in their 40s, 30s and 20s who are facing the pain.

The person in the example above with the £250,000 mortgage could be an individual who earns £60,000 a year. They are looking forward to almost £6,000 a year extra in mortgage payments and that will eat £10,000 a year pre-tax from their income to cover the extra costs of staying in their home at higher rates.

I know many will read this column who remember the real estate pain of the early 1990s and dismiss complaints about the 5 percent mortgage rate with a wry look.

Still, home prices were lower compared to wages then, and if you adjust for affordability, it would take much lower rates to cause the same pain now.

This one affordability adjusted rates chart from Sky’s Ed Conwaybased on research by Neal Hudson of BuiltPlace, illustrates that point and shows that current rates of 6 percent would bring a comparable mortgage burden to the double digits of the early 1990s.

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