After a decline in the value of the pound fueled projections of a substantial hike in interest rates, banks and building societies withdrew several mortgage deals.
Virgin Money and Skipton Building Society have ceased offering mortgages to new customers, while Bank of Ireland has withdrawn all mortgages from the market.
Halifax stated that it will no longer offer mortgages with product fees.
After the pound hit record lows, the Bank of England stated on Monday that it will “not hesitate” to raise interest rates.
The pound plummeted against the dollar on Monday following comments made by Chancellor Kwasi Kwarteng over the weekend promising additional tax cuts, in addition to Friday’s mini-budget in which he announced the largest tax cuts in 50 years. After reaching a record low of $1.03 on Monday, the pound stabilized overnight at $1.08.
The mini-budget plans will necessitate a substantial increase in government borrowing, and investors’ fears about the country’s ability to meet this debt led to a decline in the value of the pound and a rise in the cost of government borrowing.
Former US Treasury Secretary Larry Summers tweeted, “On Friday, I was extremely pessimistic on the consequences of the UK’s foolish policy. However, I did not anticipate markets to deteriorate so rapidly.”
Additionally, a weaker pound makes imports and dollar-priced items, such as oil, much more expensive and risks fueling price increases at a time when UK inflation is at its highest level in four decades.
In response to rumors that it may have acted earlier, the Bank of England stated that at its upcoming meeting on 3 November, it will conduct a thorough analysis of whether it should alter interest rates.
As a result of Monday’s volatility, the financial markets revised their forecasts, indicating that interest rates could more than double by April of next year, from their present level of 2.25 percent to 5.8 percent, to combat inflation – the pace at which consumer prices increase. In the past, it was predicted that interest rates would reach 4% by May of next year.
According to experts, a spike in the cost of long-term borrowing has made it more expensive for mortgage lenders to provide new options. There are also worries that would-be borrowers would scramble to get mortgages at favorable rates before interest rates increase, and if they do, homeowners will be unable to afford the higher payments.
According to UK Finance, the trade organization, approximately 8.3 million Britons have mortgages.
The number of residential mortgages offered by lenders decreased to 3,596 on Tuesday, compared to 3,961 on Friday, when the mini-budget was revealed, according to the financial research business Moneyfacts. It is also a significant decrease compared to December of last year when the Bank of England began hiking interest rates.
Julie-Ann Haines, chief executive officer of Principality Building Society, stated, “As a lender, we have two options. First, ensure that mortgages are affordable for customers. This is a regulatory requirement, so we must conduct a stress test to ensure that borrowers can still afford their mortgages if the Bank of England’s base interest rates increase.
And of course, the second factor is that banks and building societies must be able to make a profit, so they have to price the increased financial market perspective of interest rates into their products. This is why [mortgage] rates have been rising so rapidly over the past two to three months.
Since December, the Bank has raised interest rates seven times in a row to the highest level in 14 years.
In August, the Bank of England eliminated a rule requiring banks and building societies to conduct stress tests to see if households could withstand a 3% increase in interest rates.
According to Samuel Tombs, chief UK economist at Pantheon Macroeconomics, if interest rates rise as projected, the average homeowner refinancing a two-year fixed-rate mortgage in the first half of next year will see their monthly payments increase from £863 to £1,483.
He stated, “Many will not be able to pay this.”
Virgin Money said that the decision to cease new customer offers was a result of market conditions.
Virgin and Skipton Building Society both stated that submitted applications will continue to be processed. In addition, the lenders announced that they will provide a new variety of mortgage packages in the coming weeks.
Bank of Ireland announced on Monday that it had “withdrawn all residential and buy-to-let rates” and “will launch new ranges as soon as practicable.”
As a result of major changes in mortgage market pricing observed in recent weeks, Halifax announced on Wednesday that it will no longer offer fee-based mortgage products.
The addition of product fees to the total mortgage debt can result in lower monthly payments for homeowners with mortgages that include product fees.
However, although the monthly mortgage rate may be lower, the overall cost of the loan may be higher since more interest will accrue over time.
Halifax stated that it has not altered its mortgage rates and continued to offer fee-free product options to borrowers.
HSBC stated that it had no intentions to alter its mortgage offerings, while NatWest stated that its rates were “constantly reviewed by market realities.” Nationwide stated that it has not withdrawn any mortgage offers and will “continue to monitor the market.”
TSB declined to respond.
The Bank of England’s statement came immediately after a separate statement from the Treasury, which appeared to be meant to comfort investors by outlining a schedule for the release of further information about the government’s plans.
On November 23, the chancellor will present a “medium-term fiscal plan” that will include measures to lower the national debt, according to the document. In the coming weeks, cabinet ministers will reveal growth-boosting initiatives.
In addition, the plan would include an estimate of predicted UK growth and government borrowing from the independent Office of Budget Responsibility, which was criticized for its absence in Friday’s mini-budget.
In the government, there is a reluctance to discuss current events.
And there is anxiety about NOT discussing what is occurring.
What does that indicate?
It indicates that the government buckled itself and the rest of us into this giant dipper of market instability with reluctance.
There appears to be some relief that overnight market conditions are less turbulent.
They believe and expect – and there is a great deal of hope – that Monday’s double dose of attempted reassurance from the Treasury and the Bank of England provides a road map without panic.
However, guess what? A minister texted me immediately after I said what you just heard on the radio, suggesting that this was “too optimistic.”
The impact of these ill-considered initiatives on mortgage rates will be quite negative. If this trend continues, I do not foresee a significant rise in the pound; on the contrary, it seems more likely that the pound will continue to fall over time.
