The rise in mortgage rates threatens a crash in UK house prices

More than 2 million UK households are facing a sharp increase in their mortgage costs over the next two years, which analysts say will dramatically increase the likelihood of house prices falling as many are forced to sell.

The warning comes as average mortgage rates are expected to be above 6 percent in the first half of next year as the Bank of England hikes rates more aggressively to try to address market turmoil in the wake of Chancellor Kwasi Kwarteng’s tax cut. household last week.

The fallout has already wreaked havoc in the mortgage market, with many lenders including HSBC and Santander suspending new business for up to a week while trying to re-rate them.

Analysts said borrowers would face much higher costs after lending resumed at a time when inflation is eating away at budgets and the prospect of a recession that could eventually trigger a housing market meltdown.

“For the past few months we’ve known this was a possibility, but it looked like the worst-case scenario. Now we’re heading towards that scenario,” said Neal Hudson, real estate market analyst and founder of consulting firm BuiltPlace.

“I’m still not 100% sure the market will collapse. . . but it’s the main assumption now,” he added.

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More than 2 million fixed-term borrowers will need to refinance their debt by the end of 2024, according to Bank of England data. And buyers who have stretched their budget at low rates may simply not be able to cover the higher costs.

“I think there will be a lot of stress in the market. People who took out mortgages five years ago go from 1 to 1.5 percent interest and move up to 4.5 to 5 percent. Monthly payments could increase by £500-600,” said Andrew Montlake, chief executive of broker Coreco, adding that he expected forced sales to increase as a result.

Pantheon Economics has calculated that the monthly repayments of an average household refinancing a two-year fixed-rate mortgage in the first half of next year would rise from £863 to £1,490.

Rising interest rates and falling values ​​would also wipe out any savings from the stamp duty cut that Kwarteng announced as part of its £45bn package of tax cuts. The Chancellor doubled the threshold for shoppers in England and Northern Ireland from £125,000 to £250,000, offering a maximum saving of £2,500.

In May last year, a borrower could have secured a two-year fixed-rate mortgage with a 75 percent loan-to-value ratio at an interest rate of less than 1.5 percent. The rate for the same product is now around 4 percent and is expected to reach 6 percent or more by May next year.

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Before Kwarteng’s mini-budget spooked markets, analysts had predicted the housing market would cool as the Bank of England gradually hiked interest rates later this year.

But Ian Mulheirn, chief economist at the Tony Blair Institute for Global Change, said the new chancellor’s intervention had drastically changed expectations. “We’ve seen a reversal in expectations for where interest rates will peak: Fuel added by last week’s financial report.”

The last time mortgage rates were at similar levels was in May 2012, according to Mulhern, when the average house price was £168,400. In the last decade, it has risen to £283,500, according to official figures, as historically low interest rates have allowed single deposit buyers to stretch their budgets and borrow larger and larger sums.

Mulheirn warned that the sharp reversal in interest rates has put an overpriced housing market at risk.

“Interest rates are going back to where they were ten years ago and prices are going up [more than] 50 percent since then. It’s not exotic to think that real house prices could fall by a third over the long term,” he said, adding, “People who are at the end of their mortgage contracts are faced with a pretty terrible set of options.”