In June 2021, Monique Foulger reached a major milestone: At 30 years old, she bought her first home, a modest one-bedroom flat in Croydon in South London.
Barely a year and a half later, she’s bracing for a nearly 80% jump in her monthly mortgage payments.
Sharp increases in interest rates are set to upend Britain’s housing market and rock the country’s already weak economy. Britain’s homeowners are especially vulnerable because most mortgages have short-term fixed rates, which renew every few years, often every two or five years. For more than a decade, ultralow interest rates let British homeowners hop carefree from one low rate to another.
Now, the central bank has abruptly ended the era of easy money as it fights inflation, and millions of homeowners are facing hundreds, possibly thousands, of pounds in extra payments each year.
“I just put my head in the sand,” Foulger said of when she first heard how much higher her payments were likely to go.
By the end of next year, 2 million mortgages in Britain will have reached the end of their fixed terms. The change is even harsher for the 1.6 million borrowers on variable mortgages that tend to move with each change in the central bank’s rate. At its last meeting, the Bank of England raised its interest rate three-quarters of a percentage point, the sharpest move since 1989, taking it to 3%, the highest since November 2008. Mortgage rates that were typically below 2.5% are jumping to potentially above 5.5%.
The reverberations are spreading through the economy. Consumer spending is set to collapse as households’ disposable income vanishes to pay for larger mortgage payments on top of higher energy bills and rising food prices.
Despite the impact on mortgages, Andrew Bailey, the governor of the central bank, has said interest rates need to rise further to combat double-digit inflation spurred by pandemic-related supply chain backlogs and volatile energy prices in the wake of Russia’s war in Ukraine. “There is no easy outcome to this,” he said this month.
It’s not just global economic factors at play. The impact of Liz Truss’ tumultuous stint as Britain’s prime minister is still being felt in the mortgage market. Her plan to cut taxes and eschew economic orthodoxy sent Britain’s government borrowing costs soaring in late September and early October, pulling mortgage rates higher, too.
On Sept. 23, when Truss’ finance minister, Kwasi Kwarteng, announced the tax-cutting plan in Parliament, Foulger was on vacation in France.
Eager to rest after a busy summer season at the opera company where she works, Foulger didn’t instantly respond to her mortgage broker’s incessant efforts to reach her about a new fixed-term agreement on her loan. She had six months left on her current rate — which was just 1.56% — and didn’t initially see the urgency.
But across the English Channel, the mortgage market was quickly fracturing. Homeowners were scrambling to fix their rates before the rates rose more, while banks were pulling mortgage offers because bonds markets were moving too violently to allow them to price agreements.
In the end, Foulger tentatively agreed to a fixed rate of 5.89% for two years, bumping her monthly payments up to 791 pounds ($941), from 444 pounds. The change won’t take effect until the spring, but, already anxious about the increase, she said she had started cutting back on dining and socializing.
“It was rushed,” she said. The broker was “scared things would go up again.”
Over the past month, almost all of Truss’ policies have been reversed. Government bond yields have dropped, and traders have significantly lowered their bets on how high the central bank will have to raise interest rates. Even so, mortgage rates have hardly budged. On Wednesday, the average two-year fixed rate was 6.25%, down slightly from a peak of 6.65% on Oct. 20, according to Moneyfacts, a financial information service
Foulger, like millions of others, is hoping these mortgage rates fall further, so that by the time her current arrangement expires in March, she may be able to opt out of her 5.89% offer and get something better.
Deciding when to go with a new mortgage offer is the dilemma facing households across the country: Sign now and buy some certainty or wait and hope that rates fall, even if it’s only a little.
“The natural inclination will be to fix, but they’ve got this kind of nagging doubt about whether the rates may just come back down again,” said David Hollingworth of L&C Mortgages, a large broker and advisory firm.
For now, there are few expectations that rising interest rates will lead to large numbers of defaults and repossessions of homes. Banks are being told by Britain’s top financial regulator to do more to support customers in financial difficulty, while stricter affordability tests since the 2008 financial crisis mean households should be in a better position to manage a jump in rates.
And banks themselves seem relatively sanguine, recently noting to shareholders that defaults are low. “U.K. banks have capacity to weather the impact of severe economic outcomes,” the Bank of England committee that monitors financial stability risks said last month.
But even without repossessions, the impact of rising mortgage rates is expected to be far-reaching. There are signs of the strain in the housing market: House prices fell in October for the first time since July 2021, according to Nationwide Building Society, a mortgage lender. Experts warn that it will be harder to get mortgages to buy rental properties, while fewer first-time buyers will qualify under more stringent affordability tests.
For people with mortgages that track the central bank’s rate, soaring interest rates bring more immediate anxiety.
Mete Coban, 30, switched to a so-called fixed tracker rate in March, which has a portion that doesn’t change and the rest moves in line with the central bank’s rate. At the time, the Bank of England had raised rates a few times, up to 0.75%, back to where they were before the pandemic.
“I took it with the risk” that rates could rise, Coban said. Because they had been so low for so long, the worst he feared was maybe a rate of 1%. “That’s still manageable, but who would have ever seen the 3%?”
Now, he estimates that he will pay 450 pounds more a month than he was paying in March for his flat in Hackney in east London.
(Author: Eshe Nelson)/(c.2021 The New York Times Company)
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