In a note sent by Morgan Stanley yesterday (October 24), analysts said UK mortgage repricing to around 6 per cent rates, versus back books with deals of around 2 per cent, is a “significant reset” for both banks and borrowers.
A new prime minister for the UK is incoming. But we think the fiscal course is already changed.Andrew Sheets, Morgan Stanley“Given short fixed-rate periods, 35-40 per cent of UK mortgages may see higher rates in the next 12 months,” said Morgan Stanley’s chief cross-asset strategist, Andrew Sheets.
“With higher utility bills, a 6 per cent mortgage rate could mean that 30-40 per cent of UK households struggle to pay their mortgage.”
Some 30 per cent of households with the lowest income make up around 5 per cent of UK lenders’ mortgage books, according to Morgan Stanley.
Sheets added: “That said, we think that mortgage underwriting was of significantly higher quality than pre-great financial crash.”
The average interest rates on two and five-year fixed mortgages are both over 6 per cent, according to Moneyfacts.
Some lenders have, however, started to lower their rates. Yesterday, Coventry Building Society and HSBC notified brokers of rate cuts.
The price of natural gas has also fallen sharply today across Europe, which could have a knock on effect for electricity prices and inflation - both of which have been placing significant pressure on UK households.
Yesterday, Rishi Sunak became the next prime minister and has been tasked with leading the Tory party back to stability, after becoming the third MP to take up the top role since Boris Johnson was elected in 2019.
His predecessor, Liz Truss, lasted 44 days - a period during which the pound crashed and rates spiralled in reaction to sweeping tax cuts which were later scrapped.
“A new prime minister for the UK is incoming,” said Sheets.
“But we think the fiscal course is already changed. A recession awaits, and we forecast the BoE to hike much less than markets next year as growth slows.
Dips in affordability already set in
First-time buyers have already seen the amount they can borrow dip by as much as 30 per cent in the year-to-date, as banks have tightened their mortgage affordability calculators in the face of what have been rapidly rising rates.
With interest rate repayments increasingly eating into borrowers’ monthly incomes, lenders have become more cautious as to the maximum amounts of what they will or will not lend.
Managing director of Visionary Finance, Hiten Ganatra, conducted some internal analysis of buyers who his firm facilitated mortgages for in January, and then re-ran their affordability calculations in September.
The results showed a drop in max lending of between 24 and 30 per cent.
This means a £100,000 loan secured with the same level of income in January shrank to between £70,000 and £76,000 in September.
As a result, buyers need to boost their deposits to cover the gap created by the reduction in the loan size they can secure.
Busying themselves with remortgages, some brokers are beginning to note a dip in new purchase enquiries.
Founder of The Mortgage Hut, Chris Schutrups said he has seen a reduction of “around 30 per cent” in new enquiries for customers looking to purchase a home.
Adviser at Harmony Financial Services, Imran Hussain, said he is finding single first-time buyers are becoming slightly less confident in the market, whereas couples are happy as ever to continue with new purchases.
ruby.hinchliffe@ft.com
