UK lenders pause new mortgages amid market turmoil

Some of the UK’s biggest mortgage lenders, including Virgin Money and Skipton Building Society, have stopped offering new home loans in response to the market volatility triggered by the government’s mini-Budget.

Halifax, part of Lloyds Banking Group, the biggest mortgage lender in the UK, is also withdrawing a range of new home loans, it told brokers.

The pause in new lending comes after yields on UK bonds rose sharply following the tax cuts announced on Friday by chancellor Kwasi Kwarteng.

“This is the first time we’ve seen a major withdrawal of products and repricing in the mainstream market since the global financial crisis,” said Ray Boulger, an analyst at mortgage broker John Charcol.

“The huge rise in gilt yields means lenders have to reprice mortgages very significantly. I expect by next week there will be very few mortgage deals available with rates under 5 per cent. Any lender who hasn’t pulled out yet is almost certainly going to on Tuesday.”

He said other lenders to have withdrawn new mortgage products include Nottingham Building Society, Bank of Ireland, Leeds Building Society and Paragon Bank.

Paragon chief executive Nigel Terrington told the FT: “We pulled our new fixed-rate deals today because they’re all priced off swap markets, and they have risen dramatically in the past 48 hours.”

Virgin Money is expected to return to the market later in the week once the markets have stabilised, according to a person close to the situation.

Halifax said that from Wednesday, it would withdraw its range of mortgage products with fees, which have cheaper rates. While the lender said that the measure was temporary, there was no timeline given for when it would be reversed.

Lenders use swap rates to mitigate interest rate risk in fixed-rate home loans. “Swap rates are dictated by gilt yields, which have just shot up,” said Boulger. “So the cost to lenders has just gone up.”

Property economists sounded the alarm that rising rates and turmoil in the mortgage market could trigger a house price correction more severe than the one that followed the financial crisis.

Andrew Wishart, senior economist Capital Economics, said the housing market was in uncharted territory after Kwarteng’s announcement.

Prior to the chancellor’s statement, the consultancy expected the Bank of England’s base rate to peak at 4 per cent, from 2.25 per cent, with mortgage rates around 5 per cent — a level they are already fast approaching.

In that scenario, Capital Economics forecasts a fall in house prices close to levels seen during the financial crisis. But if the base rate rises higher, prices could fall further, Wishart said.

“At the moment, we have [forecast] a correction of 20 per cent in real terms and 7 per cent in nominal terms, which is close to financial crisis levels . . . At the current level of house prices, a mortgage rate of 6.6 per cent [would] cause affordability to deteriorate to a level not seen since 1990, which preceded a correction of almost 35 per cent in real terms and 20 per cent in cash terms.”

A stamp duty cut also announced in the budget might moderate some of the price falls but was unlikely to have much impact, added Wishart.

“It might hold off the fall in values in London for a few months, but that’s already where prices are most stretched,” he said.

While 6 per cent rates are low in historic context, and less than half their peak during the late 1980s, high house prices mean affordability is at full stretch and many homeowners would have little room to manoeuvre if forced to refinance.

“It’s about affordability. People are borrowing such large sums that 6 per cent [mortgage rates] are going to make it difficult for everyone. People are going to have less money to spend so prices will soften,” said Henry Pryor, an independent property agent.

“Already, since Friday, 30 per cent of the deals I’m involved in are being restructured because someone is twitching: they can’t borrow what they wanted to borrow or it’s going to cost them more.”