The tumbling pound has seen mortgage deals in the UK being pulled by several lenders on the back of grim forecasts relating to interest rates. The UK’s financial markets have experienced a turbulent week, with the Bank of England hiking the base rate by 0.5% last Thursday and the new chancellor, Kwasi Kwarteng, announcing a range of tax cuts a day later. By the end of the week, the pound had plunged, leading to some financial experts calling for an emergency rate hike from the UK’s central bank.
Following forecasts of rising interest rates, many lenders have withdrawn mortgage deals, including Santander, Yorkshire Building Society, Skipton Building Society, and Virgin Money. These moves will leave buyers in an even more difficult position when finding an affordable mortgage in the current financial climate. In addition, Nationwide announced that it would be hiking rates on various fixed-rate products on the back of rate hike predictions.
“Significant monetary policy response needed”
This week, Huw Pill, Chief Economist at the Bank of England, stated that a “significant monetary policy response” was needed to tackle the falling pound. He indicated that there could be a further sharp increase in the base rate, which has already risen to 2.25%.
Pill said: “In a context where there is a rebalancing of the macro policy environment and an anticipation of looser fiscal policy, I think it is hard not to draw the conclusion that all this will require a significant monetary policy response.”
Previously, economists had forecast interest rates would rise to 4% by May 2023. However, they now believe the base rate could hit 5.8% by April next year. These forecasts have had a huge and immediate impact on the mortgage market, reflected by the action already taken by lenders.
Following the revised forecasts, the number of mortgages available from lenders dropped to 3,596 from 3,961 at the end of last week. According to Lucian Cook, the head of residential research at Savills, fixed-rate mortgages will come before very difficult to price due to uncertainty over interest rates.
Lenders also have the difficult task of ensuring customers can still afford their mortgage repayments if interest rates continue to rise. Julie-Ann Haines, chief executive at Principality Building Society, said lenders would need to ‘stress-test’ mortgages to do this. She added that mortgage rates and payments had increased rapidly in recent months because financial institutions had to make a margin.
Fears over rush for mortgages
There are fears that potential borrowers may rush into getting mortgages at cheaper rates before more deals disappear, or rates go up again. This could lead to many finding themselves with mortgage debts that they will be unable to afford repayments on when rates do increase.
The weaker pound also means that living costs could rise even more due to increases in the cost of imports and products priced in dollars. This will result in even more pressure on households at a time when inflation is already at its highest in four decades.