MortgagesSep 30 2022

Mortgage market panic could see ‘massive intervention’ from FCA

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Mortgage market panic could see ‘massive intervention’ from FCA
Luke MacGregor/Bloomberg

The regulator has already entered into talks with lenders this week amid fears the daily repricing of mortgage interest rates has stretched many borrowers too far.

Some mortgage advisers argued that this intervention could go on for years.

They told FTAdviser there are still plenty of “good deals” out there, but that many borrowers will have “panicked based on the ‘secure the best rate today’ narrative”.

In a few years time, there could be a ‘massive intervention’ into the mortgage lending market by the FCA to prevent banks applying for repossession orders.Richard Bishop, PFEP Wealth Management

The industry is also worried about those homeowners who secured 1 per cent deals last year, who are due for renewal sometime over the next two years. 

According to brokers, these borrowers will be facing an environment that many lenders’ stress tests simply won't have taken into account, which for some means their mortgage repayments will become unaffordable.

“In a few years time, there could be a ‘massive intervention’ into the mortgage lending market by the FCA to prevent banks applying for repossession orders,” said managing director of PFEP Wealth Management, Richard Bishop.

“With little thought on future cash flows to cover mortgage payments, there is a good percentage of borrowers who have simply kicked the can down the road this week.”

Bishop said he is seeing clients panicking and grabbing “any deal they can find”, particularly if they are switching a mortgage deal with their existing lender.

“They seem to think securing a rate is the only metric. No thought is being given to affordability in the future…The mortgage market is in panic mode this week.”

Since chancellor Kwasi Kwarteng’s mini-Budget last week (September 23), 1,688 products have been pulled by lenders according to Moneyfacts data. 

The government’s sweep of tax cut announcements - which were unfunded - led to a jump in gilts. This also pushed up swap rates, a leading indicator for mortgage interest rates.

There's a real risk of ‘panic buying’ in the fixed rate marketSimon Cutler, Blackdown Financial

Major lender Nationwide has repriced its fixed rate mortgage products twice in just three days, with hikes of up to 1.5 per cent.

One broker told FTAdviser he spoke to an employee at a lender who said their analysts are struggling to model the economic outlook, and that they are gearing up for “big increases” in repossessions, defaults and arrears.

Some banks have already been building up their reserves for this. Earlier this year, Santander said in its results it had set aside £20mn for expected credit losses through mortgage defaults, after reserving no funds for them in 2021 or 2020.

FTAdviser approached the FCA for comment

‘Borrowers pushed to maximum affordability’

Director at Blackdown Financial, Simon Cutler, echoed Bishop’s concerns that there is a real risk of ‘panic buying’ in the fixed rate market. 

He too said there were still lots of good deals at present, but that phones are ringing off the hook with clients desperate to fix. 

Today, the average two-year fixed overall rate sat at 5.17 per cent, having jumped from 4.87 per cent overnight, according to Moneyfacts. The last time it recorded an overall average two-year fixed rate in excess of 5 per cent was November 2009 (5.11 per cent).

“I’m hoping the slight recovery in the pound plus quantitative easing from the Bank of England may just take some heat out of the market,” Cutler said.

On Wednesday (September 8), the Bank of England suspended its planned sale of gilts in response to turmoil in the bond markets, warning of a "material risk to UK financial stability" if it did not act.

Cutler added that borrowers were being pushed to the maximum affordability now. “Further rate rises will damage the housing market and property values will fall,” he said.

Credit Suisse has predicted they could fall by as much as 15 per cent, alongside a rise in unemployment.

‘Monthly interest could quadruple for some borrowers’

Knight Frank Finance’s managing partner, Simon Gammon, said lenders will currently be assessing what will happen to house prices, and how this will affect higher loan-to-values.

He said some first-time-buyers will be facing a jump from 1 to 5 or more per cent.

“If interest quadruples, that’s a material and worrying impact on affordability,” he explained. “There will be a group which finds itself in this situation.

“If they took out a £250,000 mortgage a year ago, at a 1 per cent rate, that was £2,500 a month in interest. If, at the end of two-year fixed rate, the cheapest rate is 5 per cent, then that £2,500 jumps to £12,500 annually. That more than quadruples their monthly interest payments.”

This would see a person’s monthly payments jump from £208.33 to £1,041.66.

It is prudent, now more than ever that brokers look at clients budgeting and spending habits in finer detail.David Gissing, London Mortgage Partners

“This could put a number of people in a position where they cannot afford their mortgage,” Gammon explained.

“Where they can’t do anything other than survive, and discretionary spending will end, meaning the economy will also take a hit. Mortgages are the last thing people won’t pay. It is a difficult moment for lenders to assess that.”

Mortgage sales head at London Mortgage Partners, David Gissing, said it is prudent, now more than ever, that brokers look at clients’ budgeting and spending habits in finer detail, and discuss the cost of the mortgage with the client.

“There’s always a risk of clients defaulting, irrespective of the current rates on offer,” he explained.

“Many factors can constitute a default. Of course with rates increasing and disposable income being squeezed this presents more risk.”

Managing partner at Helix Financial Partners, Adam Stiles, said defaults are an extreme scenario. 

“Ultimately lenders still have to lend responsibly so they're not going to lend to someone who can't afford it even at the higher rates but the psychological toll of seeing your payments shoot up so much is understandably upsetting and worrisome for most,” he explained.

ruby.hinchliffe@ft.com