‘Worrying spike in mortgage costs but markets could turn for the better’

If the markets assess that inflation may fall back quicker than current expectations, then lenders may also consider bringing back better deals
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Susannah Streeter15 June 2023

The rug is being pulled from under the feet of homeowners and potential buyers who had been counting on interest rates being close to their peak but now face the prospect of fresh spikes in the cost of mortgages.

Mortgage borrowing plunged in the first three months of 2023, and approvals for the coming months have been dropping too.

The recent rate rises risk sending them to rock bottom and mortgage arrears have started to ramp up. The signs are that the relatively small declines we have seen in house prices over the past year, of around one per cent according to Nationwide, will accelerate as moving onto or up the ladder becomes unaffordable.

The impact is already being felt among housebuilders with London-based Bellway signalling this week that already it has seen a 25 per cent drop in reservations this year and is having to lower prices as a result to incentivise buyers. So, there could be some better deals for new builds.

Higher mortgage rates are also hitting the rental market as more landlords start to sell due to their costs shooting up while demand rises from would-be buyers shut out from purchasing. Expensive new legislation and the increase in monthly mortgage payments could force remaining buy-to-let landlords to push rents up further, denting the ability of potential first-time buyers to save a deposit.

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown

As mortgages spike higher, it will seriously weaken the spending power of the 1.6 million households facing the horrible prospect of having to re-mortgage this year. With food prices still heading upwards, a big jump in monthly mortgage bills will act as a vice grip on spending power.

That will have huge implications for the broader economy in London. Although output increased by two per cent in the bars and restaurant sector in April, activity for consumer-facing services is still almost nine per cent below pre-pandemic levels.

It is estimated that only a third of the rapid rate increases so far has fed through to consumers and businesses so the chances of hospitality clawing back more business look slim. Likewise, it’s set to be tough ahead for chunks of the retail landscape, with shoppers focusing on essentials rather than aspirational goods.

However, the path of interest rates ahead, and the deals lenders will offer in the months to come, is still clouded in uncertainty. This is partly because the current reaction on markets could do the Bank of England’s job for it with mortgage deals already shooting up in advance of the Bank’s decisions. If the markets assess that inflation may fall back quicker than current expectations, then lenders may also consider bringing back better deals. It may seem like wishful thinking, but as we’ve seen markets are volatile and the tide can often turn very quickly.

Susannah Streeter is head of money and markets at Hargreaves Lansdown

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