When Liz Truss came into power, one of her significant headaches was the ruthless rise in mortgage costs. As of the 20th of October 2022, the now ex-British Prime Minister, Liz Truss, has resigned from her seat of power during a set of unique U-turn decisions on the government’s mini-budget last month. This has created a breadth of economic uncertainty within the country — especially in the property market.
When Chancellor Jeremy Hunt announced that he intended to U-turn on all of Kwasi Kwarteng’s planned tax cuts, the gilt and pound both rallied, but the banks began to hike mortgage rates almost immediately.
Research completed by MoneyFacts states that the average two and five-year fixed rates leapt to 6.65% and 6.5% — this is the highest they’ve been since 2008. The UK borrowing costs remained raised due to the current economic climate. Some analysts warned that mortgages were a “long way” from returning to normal.
This all comes as consumer prices (food, energy and transport) continue to rise to 10.1%, which we haven’t seen since the 1970s. The Bank of England vowed to raise interest rates again in November to curb inflation. According to a watchdog, eight million people in the UK struggle to make ends meet and pay their bills as living costs surge.
The Bank’s deputy governor has pondered whether the dramatic increase in interest rates is a sign that, globally, inflation has begun to stabilise as mortgage rates have been rising for months to tackle inflation.
The United Kingdom’s mortgage rates have jumped exceptionally high as financial markets have reacted poorly to the government’s mini-budget last month – which suggested billions of pounds worth of unfunded tax cuts.
Some mortgage lenders have suspended hundreds of mortgage packages due to the uncertainty of the market and how to price long-term loans. The number of mortgage deals available had recovered to 3,128 after being down from 2,258 when the ex-chancellor Kwasi Kwarteng announced the mini-budget.
Unfortunately for many homeowners across the country, at least 100,000 mortgage holders this month are coming to the end of their fixed-rate deals and are facing steep monthly repayments.
The mortgage lenders have warned that they are wary of being overloaded with applications while the uncertainty continues, but brokers have announced that there is still a demand for mortgages.
The switch from mortgage lenders reflects the increased certainty on interest rates by the Bank of England, with banks now because the cost of living crisis will hurt far more people, much harder due to their inability to keep up with their payments.
The rise in mortgage interest rates has also created a trend in which potential buyers are changing their first home purchasing decisions and deciding to rent for longer in smaller homes while they save up for a deposit. In London, there is four times the number of tenants for a studio flat; then, studio flats are available.
It also means that age demographics who don’t typically downsize so early, are now, as they brace for the cold, bitter economic climate to come. Across the country, we see older people downsizing from their country retirement homes and moving into city apartments to reduce household costs.
We asked Karl McArdle and Jonny Christie, Co-CEOs of The Property Buying Company, about what they think the current trajectory of mortgage rates could mean for the property market over the incoming months.
Karl told us, “The world seems quite doom and gloom at the moment; with the cost of living crisis and inflation, people struggling to pay bills, the war in Ukraine, the incoming energy crisis, government instability and the suspension of mortgages. There is certainly a sense of uncertainty in the air”.
Jonny said, “But, we can see a dramatic increase in the demand for the number of smaller rental properties available to people — specifically within cities and the suburbs. Especially accessible rental properties for elderly people moving from the countryside.”
“What we may see in the coming months is as a bid to react to the increased demand from rising mortgage rates, private landlords and property developers start to renovate older, more significant buildings into smaller flats.”
Karl said, “This property market development may continue for as long as the current economic downturn lasts.”