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UK Mortgage Market Outlook

The UK mortgage market, like most around the world, has seen unprecedented turmoil over the last year so what is the current UK mortgage market outlook as we head towards Q4 of 2023?

As the cost of living crisis, high inflation, 14 consecutive Bank of England Rate rises and falling property prices all converge on the mortgage market it may come as no shock to learn that whilst there are some positive green shoots of confidence, the overall outlook for Q4 of 2023 is largely flat with more pain expected ahead.

Rise in UK Mortgage Arrears

The value of UK mortgage arrears jumped by almost a third in Q2/2023 (April-June) compared with the same period last year, the Bank of England has said.

Whilst it was expected that the cost of living crisis and 14 consecutive Bank of England Rate rises would do little else other than harm the affordability of mortgages, the scale of the rise in arrears is truly a worry, not just for the homeowners in arrears, but to the lenders seeing a rise in the risk of their balance sheets due to the double hit of rising arrears amid falling property valuations.

Stubbornly High Inflation

Whilst it is the rate of interest that has biggest effect to mortgage repayment affordability experienced by homeowners, inflation has a multi-pronged effect on the outlook of the UK mortgage market.

UK inflation was over 11% in October last year and it was just under 8% in June this year, having dropped further to its current 6.8%, but the reality is that this is still more than 300% above the Bank of England target of inflation at 2% or less.

This effects the mortgage market by eroding the value of homes in addition to eroding the affordability of homeowners in repaying their mortgages as the only tool the Bank of England have [in tackling inflation] is to raise interest rates. 

This squeeze from both ends has hit homeowners severely over the last year.

14 Consecutive Interest Rate Rises

Unlike the US mortgage market, where it is common practice for mortgages to have a fixed rate of interest for the entire duration of the loan, in the UK fixed rates are typically only offered in two year and five year duration.

In tackling inflation the Bank of England has increased the rate of interest an unprecedented 14 consecutive times at its last 14 policy meetings. 

Whilst the rate of inflation has been coming coming down, that it has remained stubbornly high is still a major concern. This likely means that the interest rises may well be coming to an end as inflation continues to fall, but that there is an expected one or two rises left to play out, thus putting more continued pressure on an already struggling UK mortgage market.

Last week, the Bank of England Governor Andrew Bailey told MPs that interest rates, which are at 5.25 per cent after 14 consecutive rises, were “much nearer” to the top of the cycle but he did not rule out another rise in rates at the next Bank of England rate meeting next week. 

The consensus seems to be that there will be another 0.25% rise next week with a slow down in the rate of rises in the Monetary Policy Committee dates between the November, December and February meetings. 

The expectation seems to be that over the next four Monetary Policy Committee dates, the rates will not continue to be increased at each meeting, but that there will be two x 0.25% increases between now and February as we reach the top of the anticipated rise in interest rates cycle.

The translates to an average rate on a two-year fixed mortgage deal of 6.8%, while a five-year deal is 6.28% – highs not seen since late last year, when the average reached 6.85 per cent at the start of August, the highest level since 2008.

But whilst high street mortgage rates have slightly fallen on the back of better than expected inflation data, the mortgage Swap rates have continued to drop, which is usually a signal of a general movement of lower rates of interest across the board.

Adverse credit mortgage rates are still surprisingly closer than expected to the rates available on the high street. Rates from 6.34% with up to 75% LTV and from 6.95% up to 85% LTV are available from a number of adverse credit mortgage brokers.

UK Mortgage Market Outlook

“Affordability is shaping the lending that is going ahead. Higher mortgage rates have made it more difficult than ever for buyers.” according to Andrew Wishart, senior property economist at Capital Economics.

The general consensus amongst the policy makers, the brokers, lenders and financial advisers seems to be that whilst we may have a little more storm to weather, the severity of the storm is starting to near its peak and from that point onwards (either Q1/2024 or Q2/2024) we can expect the UK mortgage market to stabilise more, for marginal increases to mortgage affordability to take effect and for some confidence to once more enter the market.

Business Chamber is an online business and small business news chamber, bringing you selected news on wider economic and business events interspersed with SME news and events that usually dont get a look in by mainstream syndicated news outlets.

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