Mortgage rates: More pain to come from ongoing chaos

Leading up to the recent unexpected interest rate hike, BBC News interviewed numerous individuals who are now confronted with unimaginable increases in their mortgage expenses. Countless individuals have come forward, volunteering to share their stories:

“My monthly mortgage payments rose by £270.”

“It’s absolutely terrifying.”

“An increase of several hundred pounds.”

“I struggle to sleep at night. It’s distressing. I feel powerless.”

This week witnessed a stagnation in inflation, the Bank’s attempt to regain control, advisors from Number 11 cautioning about the necessity to “induce a recession,” and an eruption of blame regarding inflation. All of this occurred amidst the backdrop of distressing mortgage situations for households.

During my visit to a mortgage broker in Brighton, I was taken aback by the acknowledgment that these mortgage rate increases were not only possible but also outlined in the “Key Facts Illustration,” a mandatory component of mortgage applications.

According to him, it is now feasible to extend loan terms for certain clients, resulting in mortgage durations that extend until they reach the age of 80. This means mortgages lasting for up to four decades.

In recent years, the idea of a mortgage term exceeding 30 years, which was once uncommon and only affected a small percentage of first-time buyers, has become the standard for over half of all buyers.

If someone with a £200,000 mortgage extends their term from 25 to 33 years, they could potentially reduce their monthly payments by approximately £150. However, it’s important to note that the overall interest cost of the loan over its lifetime would increase by £50,000.

The practice commonly referred to as “extend and pretend” is prevalent in commercial markets. Both the government and the opposition are advocating for banks to provide this as a potential solution to the ongoing mortgage crisis.

This could be one of the contributing factors that are dampening, or at the very least, postponing the effects of the substantial rate increases witnessed thus far. Additionally, more individuals are currently on fixed-rate mortgages compared to the previous significant rate rise cycle in the 1990s.

The Monetary Policy Committee of the Bank of England has repeatedly emphasized that the “full impact” of the rate hike will not be felt “for some time” due to these factors.

The crucial question at hand is not only why British inflation is more persistent compared to other countries, but also whether interest rates in the UK are rising higher than in similar nations.

With a week marked by stagnant inflation and impactful rate increases from both the Bank of England and mortgage markets, a blame game surrounding inflation is emerging, creating a sense of confusion in monetary matters.

If market predictions are accurate, UK interest rates are projected to reach 6-6.25% in early 2024 and remain at that level for the majority of the year. These interest rate levels have not been witnessed since 1998.

Unlike the previous occurrence last autumn, the Bank of England has not actively diverted market expectations from these projections. The Bank states that its decisions are dependent on data, indicating a willingness to adapt accordingly.

It has been a quarter of a century since the Bank of England gained independence from the government and obtained the authority to determine interest rates with the objective of maintaining low and stable inflation.

During a significant portion of this period, interest rates remained extraordinarily close to zero for about a decade and a half. This was done to bolster the economy following the 2008 financial crisis, during which bank lending nearly came to a standstill.

The process of restoring interest rates to normal levels was always expected to be challenging. The essence of independence lies in the fact that the Bank of England can prioritize making difficult but necessary decisions, even if they might be unpopular.

In the United States, Jerome Powell, the head of the central bank, has consistently highlighted that raising interest rates serves as a means to address inflation and bring about a “correction” in the housing market. This approach effectively communicates his determination to the financial markets and underscores the intended impact of such measures.

Bank of England Governor Andrew Bailey is known for his composed demeanor and is unlikely to be perturbed by criticisms, particularly those from newspapers supporting Liz Truss, who believe that the Bank should have acted more swiftly to stabilize the markets following the mini-budget. Bailey is expected to maintain his calm and collected approach despite the criticism.

During this week, there were instances of public criticism directed at the Bank of England from certain members of the cabinet. In response, former Bank officials highlighted that the government’s own policy decisions, particularly regarding post-Brexit trade and workforce, had played a role in exacerbating inflationary pressures.



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By Ryan

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