The heavily mortgaged generation will pay the price for the UK rate crisis

The events of the past week have been staggering, as Britain has gone from trudging through difficult financial times to full-scale Bank of England intervention.

The UK economy doesn’t exist in isolation and much of the rest of the world is also being hit by the storm of inflation and a strong dollar, but it’s impressive to shoot yourself so hard in the foot that you trigger your own mini financial crisis. .

It tends to pay off if you can keep your head when all the commentators around you are losing theirs, so I’ll go easy on the hyperbole and let the list speak for itself: sterling, gilt soaring returns , fears of the collapse of pension funds and mortgages. chaos.

Kwasi Kwarteng's carefree statement contained debt-financed tax cuts and big spending measures in a growth boost, but came off a budget and no OBR report

Kwasi Kwarteng’s carefree statement contained debt-financed tax cuts and big spending measures in a growth boost, but came off a budget and no OBR report

Kwasi Kwarteng’s free mini-budget debt-financed tax cuts are not the only culprit for the situation we find ourselves in: the muddled Bank of England over the past year must also bear some of the blame.

However, as disappointed as some corners of the markets were by last week’s 0.5 percentage point rise in the base rate to 2.25 percent, compared with the larger 0.75 point rise Fed percentage rate, it’s hard to see how this would have happened without the events of Friday.

Kwasi’s growth ideas may be the kind of thing we need to lift Britain out of its post-financial-crisis doldrums, but the problem was delivery.

Announcing such a barrage of tax cuts and spending outside of a budget, or even a Fall/Spring Statement, was unorthodox; doing it while financing with debt and without an OBR report next to it was foolish.

Combine that with 9.9 percent inflation and questions looming over the performance of the Bank of England’s monetary policy, and even its independence, and you have a recipe for massive failure of your bold plans.

Trust is hard to win and easy to lose, and much faith in Britain’s prudent ability to manage its finances has been wasted.

Back in the days of the financial crisis, I used to scold one of our reporters for his excessive use of the word butchery, but the last few days have felt quite butchery.

This culminated in the Bank of England intervening yesterday, with an emergency bond-buying ‘golden market operation’ which we explain here.

The Bank will be buying long-term UK government bonds to try to stabilize the market and keep yields from soaring (government bonds are meant to be the stable, boring part of the market, remember).

The catalyst for this is reported to have been fears of pension funds collapsing, as final salary schemes invested in complex liability-linked mutual funds linked to derivatives faced huge demands for cash.

The fallout from the fiscal profligacy has seen the pound tumble, UK lending rates soar and the base rate is now forecast to rise as much as 6%.

The fallout from the fiscal profligacy has seen the pound tumble, UK lending rates soar and the base rate is now forecast to rise as much as 6%.

The fallout from the fiscal profligacy has seen the pound tumble, UK lending rates soar and the base rate is now forecast to rise as much as 6%.

Hopefully the Bank’s action will work and also help stabilize the mortgage market, where borrowers have seen rates soar, adding hundreds of pounds a month to payments for those in the unfortunate position of needing to re-pay. mortgage.

I have spoken to borrowers this week who are facing a £400 or £500 increase in their monthly bills as they exit cheap fixed rate deals they signed up two or five years ago and face much higher rates now.

To put this in context, at the beginning of the year, Nationwide had a five-year fixed rate of 1.49 percent, following its price revision this week, the mortgage company’s five-year fixed rates start from 5.19 percent. On a £250,000 mortgage over 25 years, that’s the difference between paying £999 a month and £1,489, also known as £490.

Many of those whose fixed mortgages end anytime in the next two years are highly concerned about the payment shock they face, but the most pressing scenario is for those whose agreements end in the next three to six months.

Not only are they looking down the barrel of much higher rates, but they have also seen swaths of lenders scrapping deals or pulling out of the market for new business this week, creating a sense of panic.

There’s no need to panic, as we explain in our What to do if you need to get a mortgage guide, brokers we’ve spoken to this week assure us that offers are available, but add that rates are changing rapidly and call volumes They are running very high.

Normally, when the fear gauge goes off, it’s the worst time to try to do anything, but for those who need to secure a mortgage, the problem is that there are also forecasts that the Bank of England may now need to raise the base rate to 6.25 . percent

Whether I could ever get there before the severe financial pain inflicted on people stuck in raises is something I would wonder. But I also wouldn’t have predicted that rates would rise as fast as they have this year, and I spent years advocating rate hikes when the bank stalled.

Homes are more expensive than ever compared to profits, yet the message from many in the finance industry has been that this doesn't matter as mortgage rates are low;  now they are spiraling and the borrowers have been caught.

Homes are more expensive than ever compared to profits, yet the message from many in the finance industry has been that this doesn't matter as mortgage rates are low;  now they are spiraling and the borrowers have been caught.

Homes are more expensive than ever compared to profits, yet the message from many in the finance industry has been that this doesn’t matter as mortgage rates are low; now they are spiraling and the borrowers have been caught.

Borrowers have every right to feel bad around here, as central banks have assured them for years that when rates do rise it will be smooth and gradual.

Instead, it turns out that the raise was delayed too long and then the raises delivered brutally and quickly.

Borrowers spent years being reassured by central banks that rates would rise gently and gradually. Instead, it has been brutally and quickly

I’ve spent years writing about mortgages and house prices and have regularly published updated versions of the chart above, which shows house prices versus wages.

It illustrates how, even after the financial crisis, property values ​​never returned to their long-term average and how the ratio has skyrocketed since 2012.

Houses are more expensive than ever compared to profits and it has become abundantly clear that unless wages start to rise substantially this would be a problem when interest rates start to rise.

Others regularly voiced this same concern, but many in the financial industry have resolutely dismissed it as a minor issue.

The message from those supposedly informed has been that this doesn’t matter, since mortgage rates were low and monthly payments are affordable; now they are skyrocketing and borrowers are getting hit.

Will we see any banks, building societies, other financial firms, or even regulators raise their hands and say, ‘sorry, we were wrong’? I seriously doubt it.

This will cause another outbreak of intergenerational inequality, as it is the heavily mortgaged generation of homeowners in their 40s, 30s and 20s that bear the pain.

That person in the example above with the £250,000 mortgage could be a person earning £60,000 a year. They’re looking for almost £6,000 extra a year in mortgage payments and that will eat £10,000 a year before tax out of their income just to cover the extra costs of staying in their home at higher rates.

I know there will be many reading this column who remember the homeownership pain of the early 1990s and dismiss complaints about 5 percent mortgage rates with a wry stare.

However, house prices were lower compared to wages at the time and if you adjust for affordability, it takes much lower rates to cause the same pain now.

East Sky’s Ed Conway affordability-adjusted fare chartbased on research by Neal Hudson of BuiltPlace, illustrates that point, showing that 6 percent rates today would generate a mortgage burden similar to the double digits of the early 1990s.

Hopefully the Bank of England and the government get this situation under control quickly, in the meantime This is Money will keep you up to date on what you need to know and what it means for you.

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