Jump in mortgage rates threatens UK property price crash

More than 2mn households in the UK face sharp rises in their mortgage costs over the next two years, dramatically increasing the chances of a property price crash as many are forced to sell, according to analysts.

The warning comes as average mortgage rates are forecast to exceed 6 per cent in the first half of next year as the Bank of England raises interest rates more aggressively to try to address the market turmoil in the wake of chancellor Kwasi Kwarteng’s tax-slashing mini-Budget last week.

The fallout has already caused chaos in the mortgage market, with many lenders, including HSBC and Santander, suspending new deals for up to a week as they attempt to reprice them.

Analysts said that once lending resumed, borrowers would face much higher costs at a time when inflation is eating into budgets and the prospect of a recession looms, which could ultimately trigger a housing market crash.

“For the last few months, we’ve known this is a possibility but it’s looked like the worst-case scenario. Now we are heading for that scenario,” said Neal Hudson, a housing market analyst and founder of the consultancy BuiltPlace.

“I’m still not 100 per cent certain the market will crash . . . but it’s the main assumption now,” he added.

More than 2mn borrowers with fixed-term products will need to remortgage between now and the end of 2024, according to Bank of England data. And buyers who stretched their budgets when rates were low may simply not be able to cover the higher costs.

“I think there will be a lot of stress in the market. People who agreed mortgages five years ago are coming off 1 to 1.5 per cent rates and moving to 4.5 to 5 per cent. Monthly payments could go up £500 to £600,” said Andrew Montlake, managing director at broker Coreco, adding that he expected forced sales to increase as a result.

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

Rising rates and falling values would also wipe out any savings from the stamp duty cut that Kwarteng announced as part of his £45bn package of tax cuts. The chancellor doubled the threshold for buyers 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 per cent loan to value ratio came with an interest rate of under 1.5 per cent. The rate for the same product is now about 4 per cent, and by May next year is expected to hit 6 per cent or higher.

Before Kwarteng’s mini-Budget spooked the markets, analysts had forecast the housing market would cool as the Bank of England put up interest rates gradually over the course of 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 whiplash turnround in expectations of where the base rate is going to peak: the fuel was added by the fiscal statement last week.”

The last time mortgage rates were at a level similar was in May 2012, according to Mulheirn. At that point, the average house price was £168,400. Over the past decade it has risen to £283,500, according to official figures, as historically low interest rates allowed buyers with a deposit, to stretch their budgets and borrow larger and larger sums.

Mulheirn warned that the sharp reversal of the trend in interest rates had left an overpriced housing market perilously exposed.

“Interest rates are going back to where we were a decade ago, and prices are up [more than] 50 per cent since then. It’s not exotic to think you could see real house prices fall a third in the long term,” he said, adding: “People coming to the end of their mortgage deals are facing a fairly awful set of options.”