UK mortgage burden heads towards 1980s level when it was followed by housing crash

Britain’s mortgage burden is heading towards its highest level since the late 1980s, which saw the mortgage burden rise to around 30 per cent before the biggest housing crash in modern times.

With mortgage lenders bringing back products at much higher rates after the Conservatives‘ mini-budget, predictions show that even at six per cent, the majority of households will be spending more on their mortgage than they have in almost 40 years.

The mortgage burden, or the proportion of income spent on mortgage repayments, is set to reach more than 27 per cent if the average mortgage rate climbs to six per cent. 

But for some types of mortgage deals this has already happened, as average two-year fixed-rate deals crept above the six per cent mark today for the first time since 2008. 

This burden is beaten in modern history only by rates of around 30 per cent in the late 1980s, which came just before the largest housing crash on record.

Even during the financial crisis of 2008, the mortgage burden peaked at about 24 per cent.

Chancellor Kwasi Kwarteng has called a crisis meeting with leading high street banks amid fears of a mortgage crisis, Sky News reports. 

Experts are warning the public to carefully consider whether now is the best time to buy a house. 

MoneyFacts spokesperson Rachel Springall said: ‘Borrowers may well be concerned about the rise to fixed mortgage rates but it’s essential they seek advice to assess the deals that are available to them right now.

It is estimated that house prices could fall by around 10 per cent over the next two years

It is estimated that house prices could fall by around 10 per cent over the next two years

‘The drop in product availability may be worrying but many lenders have been vocal to stress their withdrawals are temporary amid interest rate uncertainties.

‘Fixing for longer may seem more appealing, particularly as both the average two and five-year fixed rates rise to levels not seen in over a decade. 

Chancellor calls banks crisis summit 

Chancellor of the Exchequer Kwasi Kwarteng has called a crisis meeting with high street banks tomorrow to address fears of a mortgage market meltdown. 

The Treasury has convened a meeting tomorrow at which the Chancellor is set to grill lenders over their plans, Sky News reports.

Executives from Barclays, NatWest and Lloyds are among those expected to attend.

It comes as average two-year fixed-rate deals crept above the six per cent mark today for the first time since 2008.

‘Consumers must carefully consider whether now is the right time to buy a home or to wait and see how things change in the coming weeks.’

On the day of the mini-budget, September 23, the average two-year rate was 4.74 per cent.

Rates have partly been driven significantly higher since then due to concerns that the Bank of England is set to announce a large leap in base interest rate on November 3 by at least one per cent.

Prime Minister Liz Truss has repeatedly insisted that interest rates are set ‘independently by the Bank of England’ and denied claims that government policy is driving up mortgage rates.

She repeated this during her speech at the Conservative Party conference earlier today. 

Across all deposit sizes, a typical two-year fix stood at 6.07 per cent on Wednesday, creeping up from 5.97 per cent on Tuesday.

In December last year, the average two-year fix was 2.34 per cent. Based on someone having a £200,000 mortgage paid back over 25 years, their average monthly payments at that rate could have been £881.20, Moneyfacts calculated.

But based on current average rates, they could face paying £1,297.17 per month – a difference of nearly £416 or nearly £5,000 per year.

Mortgage lenders are bringing products back to the market at higher rates of around six per cent as the housing market looks to stall with prices falling by up to 10 per cent in the next two years.

More than 1,600 mortgage offers were removed from the market in the wake of the government’s mini-budget as markets balked at unfunded tax cuts and the pound fell to a record lower against the dollar at 1.03.

Loans are now returning to the mortgage market – but at significantly higher rates, as government critics say the budget has put people’s houses at risk.

Meanwhile the turbulence in the markets could lead to the housing market stalling and a dramatic drop in prices, by up to 10 per cent according to experts.

The government cut stamp duty as one of its mini-budget measures, but it has been warned this will do little to ease market concerns.

At the start of this week there were almost 2,400 mortgage loans on the market, up by nearly 100 on Sunday, according to analyst Moneyfacts.

On the day of the mini-budget there were almost 4,000 products available for buyers to choose from. 

But it also said the average two-year fixed-rate reached 5.97 per cent on Tuesday, The Telegraph reports. This is the highest rate in 14 years.

By comparison, the average before Kwasi Kwarteng’s £65 billion package of unfunded tax cuts was announced was 4.74 per cent.

In December, the rate was 2.34 per cent. This was when the Bank of England’s base interest rate was at 0.1 per cent, compared to 2.25 per cent today.

This is expected to rise further when the Monetary Policy Committee meets on November 3. 

Britain’s biggest mortgage lender Lloyds Banking Group will see even higher rates at its bank Halifax, which is raising its two-year deals for new-build buyers to 6.59 per cent from today.

On Monday TSB confirmed it was increasing its stress tests to 8 per cent for existing homeowners and 7 per cent for first-time buyers.

David Hollingworth of L&C Mortgages told the newspaper: ‘I expect that we will continue to see rates coming and going quickly this week but it’s positive to see lenders returning to the market after their temporary withdrawal.’ 

But mortgage brokers have warned it will take time to see the market recover and rates fall.

Riz Malik, mortgage advisor at R3 Mortgages, said the government’s U-turn on abolishing the 45p tax for the highest earners was ‘welcome news’ but that markets would not settle down until the OBR published its response to the budget.

Mr Malik said: ‘The OBR’s response to the mini-Budget needs to happen as soon as possible to potentially undo some of the damage that was done last week. 

‘Even if the markets respond well, I fear mortgage lenders may take some time to reflect positive news in their pricing. We may see further U-turns at this rate.’

There are fears the uncertainty in the mortgage market will unfairly impact first time buyers, as some experts warn 95 per cent loan-to-value products, which enable a buyer to only pay a five per cent deposit, could become far more expensive.

Amit Patel from mortgage broker Trinity Finance said: ‘The removal of 95 per cent loan-to-value mortgages would be a catastrophe as it would effectively put first-time buyers out of reach of being a homeowner overnight. 

‘It’s important to remember that not all buyers have the luxury of having a family member who can help financially towards their deposit. 

‘Lenders will most likely increase their rates to mitigate the risk on their 95 per cent loan-to-value mortgages if the property market starts to dip. 

Five per cent deposit mortgages will still exist but be more expensive.’

Meanwhile house prices are also expected to fall dramatically over the next two years – by around 10 per cent, according to industry analysts.

Estate agents Knight Frank have revised down growth estimates for the next two years and now predicts a fall in prices of five per cent in each of the next two years, The Times reports. 

Andrew Wishart, senior property economist at the Capital Economics consultancy, no expects a fall of 12 per cent from ‘peak to trough’. 

He had previously estimated that house prices would fall 7 per cent. 

‘A large rise in mortgage arrears and repossessions is probably unavoidable,’ he told The Times.

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