WHEN I’ve been at summer parties recently, some people have asked me when I’m due. I was beginning to get paranoid about my barbecue belly. But it turns out they were asking me the question de jour – when am I due to remortgage? When is your two-year or five-year fix rate deal due to end?
This wouldn’t have been the usual topic of conversations at barbecues in the past. Over the years, people would have been much more likely to discuss house prices. Are they going to keep rising? How far are they going to rise? How much is my house worth? This was particularly the case during the lower interest rate environment between 2009 and 2021.
During this time, interest rates were their lowest in history for a sustained period. It’s worth remembering that before the global financial crisis struck, interest rates hadn’t ever been below two per cent. In the period between 2009 and 2022, interest rates were below two per cent for that entire time, and for most of that period, they were below one per cent. Indeed, it wasn’t until September 2022 that they got back above two per cent.
Since 2021, the Bank of England has been increasing interest rates at a speed and scale that we have not seen before. Indeed the Bank of England’s MPC hiked rates two weeks ago for the 13th successive meeting. The rate rise was expected but the scale of the increase was not. The 50bps/0.5 percentage point rise moved bank rate from 4.5 per cent to 5.0 per cent. This took rates to the highest level since before the collapse of Lehman Brothers in September 2008.
The problem is the Bank of England is not done and interest rates have yet to peak. This expectation that rates could rise to 6.0 per cent or 6.25 per cent (financial market expectations with rates staying above 6 per cent until at least September next year) is a result of very sticky inflation and the Bank of England’s failure to get inflation under control. It is also what has pushed mortgage rates higher.
Bank rate was last 6 per cent in February 2001 and it was last 6.25 per cent in early January 1999. But I doubt people will be partying like it’s 1999 given the higher mortgage costs that come with higher interest rates and that the cost of party food and drink has risen so much with inflation!
When the BoE was last seriously increasing interest rates there were almost 12 million mortgages in the UK and more than half of these were on variable rates.
Now there are one million fewer mortgages and 85 per cent are on fixed-rate deals. The Bank of England now finds that it has to inflict more pain on the relatively few mortgage holders whose deals are refinancing soon in order to generate a timely reduction in economic activity and reduce inflationary pressures. Only two-fifths of the mortgage pain has come through to date.
There is a mortgage timebomb ticking with the pain accumulating over the next four years or so. Those mortgage holders who have fixed over the last few years are now nervously waiting to roll off their historically low interest rates to something significantly higher.
The Resolution Foundation calculates that in the UK, additional annual mortgage repayments will cost almost £16 billion per annum more than in December 2021. The annual repayments of those re-mortgaging in the UK over the next year are set to rise by £2,900 on average (on top of food and energy bills increases).
The impact is significantly higher for those in their 20s, 30s and 40s who are relatively new to the housing market and have relatively more debt due to the length of time they have been paying their mortgages down.
According to data provider Moneyfacts, last week, the average two-year fixed rate mortgage was 6.26 per cent and five-year fixed rate products were averaging 5.87 per cent. These compare with 2.34 per cent (2-year) and 2.64 per cent (5-year) in December 2021 when bank rate was 0.1 per cent. When it comes to a £150,000 mortgage over 30 years at monthly repayments would have been £603 at a 2.64 per cent interest rate. At 5.87 per cent, the monthly repayments would be £887. This is a rise of £274, or a 45 per cent increase.
From the example above, this £3,000 additional mortgage cost per annum could otherwise have been spent on the high street, towards a holiday or on a new car. Instead the money is lost to higher interest rates. So the economy, as well as individuals and households, will feel the impact of these extra mortgage costs. It will also have inevitable impacts on the housing market too. We may get back to talking about prices at barbecues in the months ahead.
But it might be about how much price growth has slowed or indeed whether an adjustment is happening in some parts of the market and in some areas. Though we should remember that the market is not actually one market; it is lots of different markets in one. So conversations about prices may vary radically depending on who is having the barbecue and the postcode of the house the barbecue is happening in.
From an economist’s perspective, the more significant conversation is around transactions and the impact repricing of mortgages will have on activity in the market. This will take time. Consider those first-time buyers from a few years ago may find the mortgage rate shock will delay their ability to trade up or climb the property ladder. This will have a knock-on effect on wider property chains.
Another question that has become a characteristic of the Northern Ireland housing market in recent times is whether the big flow of buyers coming back here from England will continue. These people have buoyed the market in recent times and have exacerbated supply and demand challenges as they don’t free up another property here when they buy.
Whatever happens, the housing market will continue to be a topic of hot conversation over the summer. Just try to avoid the smug person who fixed for 10-years at a low rate two or three years ago!
:: Richard Ramsey is chief economist at Ulster Bank