Inside the breakdown of the UK’s mortgage machine

Immediately after the UK’s new chancellor Kwasi Kwarteng’s “mini” Budget speech last Friday, Atom Bank chief executive Mark Mullen realised the extent of the chaos that was about to be unleashed and got on the phone to his commercial director.

“I asked to be ready to remove our commercial range from sale because I could see there could be a rush to [lock in fixed rate] mortgages,” said Mullen, whose bank specialises in selling home loans online.

“Contagion can be quite destructive and so our risk was we’d find ourselves swamped with mortgage applications that we don’t have either the capacity or the appetite to write in such a volatile environment.”

As markets digested Kwarteng’s unfunded tax-slashing plans, Mullen’s fears were realised as sterling fell to historic lows against the dollar while gilt yields soared. Investors bet that the Bank of England could keep hiking interest rates to as high as 5.8 per cent next year.

The banks were left scrambling as the gilt yields used to price mortgages moved so quickly that new home loan deals were unprofitable just hours after their interest rates were set. Fixed-rate mortgages became instantly unaffordable for many smaller banks operating on tighter profit margins.

Across the country, providers withdrew 1,688 mortgage products, leaving would-be borrowers in limbo and raising fears of a collapse in house prices.

By Monday evening, the first providers had begun to pull products. Lloyds Banking Group — the UK’s largest mortgage provider — withdrew a range of fixed fee products, while Virgin Money, a top ten provider, and Skipton Building Society, both informed brokers they would stop offering new home loans.

A tide of smaller lenders, including Nottingham Building Society, Bank of Ireland, Leeds Building Society and Paragon Bank, also pulled products, citing sharply rising swap rates — which mitigate interest rate risk as banks swap fixed-rate money from borrowers for a floating rate.

“After we saw Virgin and Skipton pull their ranges, we decided we didn’t want to find ourselves on the wrong side of demand,” said the head of a challenger bank.

With a swath of products removed from the market on Monday — most of which were among the most competitive deals — consumers switched their focus to providers still open for business.

“As the next cheapest disappears you get bumped up the list,” said the director of mortgage distribution at a building society. “Even if you’ve got funding, you’re now taking in more business than you’ve got capacity for.

“At some point you have to make a decision when you pull those rates. I needed to protect myself and the staff.”

Throughout Tuesday the largest lenders with the biggest capacity were suddenly inundated with applications. Brokers reported waiting in two-hour queues behind close to 700 other people trying desperately to lock in deals before products were repriced and made more expensive.

“I was literally watching the application numbers by the minute,” said a mortgage executive at one of the 10 largest providers. “If you were graphing it, it was a straight line upwards, it was quite incredible.”

“We saw a threefold increase in existing customers contacting us,” they added. “We had a number believing the tripling of interest rates meant that their mortgage payments would triple.”

Executives still offering loans compared the experience to the early 1990s in London, when people queued around the block to secure a fixed-rate mortgage as interest rates shot above 10 per cent.

“There were queues around Southampton Row and up High Holborn, people wanting to buy a 10.5 per cent fixed rate mortgage,” said Andy Golding the chief executive of OneSavings Bank, who was working for NatWest in London at the time. “Banks were having to limit the number of fixed rate mortgages, though.”

This week the largest lenders soon began breaching their daily quotas for new business, which are internal controls to prevent a strain on the processing of existing applications. HSBC suspended new deals early on Tuesday afternoon, while Santander withdrew some products and Nationwide increased rates.

The speed with which smaller providers exited the market caused frustration among larger lenders.

“We were taken aback by how quickly some people withdrew their products,” said the head of mortgages at a high street lender. “If you’re a supplier of any product and rely on raw materials you have a period of time in which you should be planning. You shouldn’t need to act in a knee-jerk way.”

The same head of mortgages said his bank had coped with the surging demand by moving staff around to deal with incoming inquiries and encouraging customers to make more use of technology like web chats.

Despite the BoE’s £65bn intervention to calm markets on Wednesday, banks are still waiting for order to be restored and are expected to return with repriced products in the coming days — albeit with significantly higher rates.

Volatility throughout the week remained extreme, said the chief executive of one high street lender, pointing to two and three year swap rates which had come back in by 100bp by Thursday: “That’s a huge move — the kind you see only once or twice in the past 30 years.”

By Thursday, the Financial Conduct Authority had begun asking UK banks about the 2mn borrowers with fixed-term products that might need to remortgage between now and the end of 2024.

The regulator was particularly concerned about borrowers’ ability to pay much higher rates in excess of 5 or 6 per cent — some analysts have suggested that households might face spending between 40 and 50 per cent of their take-home income on mortgage payments within the next year.

But for the banks, the violence with which the market moved has meant they are still scrambling to recover.

“This week caught everyone unaware — I was with the board, and it was a shock,” said the chief executive of a high street bank. “Instability in the market was pretty shocking and a little scary.”