Wed 26 Oct 2022

The rising cost of borrowing: what now for UK mortgage borrowers?

As many will be aware, we are currently living in a challenging economic landscape. With energy prices hiking, inflation continuing to rise, and the ongoing cost of living crisis, it is evident that most of the population will, or are already experiencing a strain on personal finances.

Market uncertainty arising from the government's proposed mini-budget has unfortunately compounded the current situation; in anticipation of further inflation and monetary tightening, the Bank of England has raised its base rate to a record 2.25%, its highest level in 14 years. It follows that lenders are beginning to take a risk-averse position, and in particular, the cost of mortgages is rising.

Effect on borrowers

This is of course bad news for existing mortgage borrowers, especially for those whose fixed-rate deals are coming to an end - they may need to brace themselves for significant increases to their monthly payments. The audience that will be affected the most, however, is arguably those who are looking to purchase for the first time, and therefore are seeking a new mortgage now.

The price of a fixed-price mortgage had already been increasing in recent months, but in recent weeks lenders are now having to assess affordability almost on a daily basis. This has meant that deals have been withdrawn and brought back to the market at higher prices; as on the 14th of October the average interest rates on two and five-year fixed rate mortgages across all deposit levels stood at 6.46% and 6.28% respectively. To compare, a year ago it was possible to enter into an agreement with an interest rate of less than 1%. With mortgage rates changing on a daily basis, and at a rapid pace, new buyers may unfortunately find they can no longer meet their lender's affordability criteria, or in the worst scenario have their offers suddenly withdrawn as the lenders find that they need to change their products in line with recent developments.

What can we expect now?

Unfortunately, continued market uncertainty and volatility with Sterling means that the current situation is unlikely to alleviate soon. Inflation is projected to rise further as we head into 2023, and this in turn means that rising interest rates will continue to affect the cost of borrowing. The Scottish Government has also confirmed that it has no plans to follow the recent announcement by the UK Government of plans to increase Stamp Duty thresholds in England and Wales, and so Land and Buildings Transaction Tax in Scotland will remain unchanged.

It can safely be said that the current environment means that the conditions for borrowing are more difficult than before. Lenders are also faced with the difficult balancing task of reacting to challenging circumstances, but also acting in line with the FCA's guidance to ensure that their customers can access the help they need.

The textbook of course states that in times of high interest rates the average consumer or business will be more inclined to save rather than spend and invest, so we can perhaps expect to see this trend going forward. It remains to be seen, however, how this will transpire in a time when the cost of living crisis means that consumers are having to relying more on borrowing to cover their living expenses.

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