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UK Borrowers Face Higher Mortgage Rates Leading to Economic Damage
The Rising Mortgage Costs Affecting the UK Economy
UK borrowers are facing a sudden crisis that could severely damage their economy as an increase in mortgage costs hits deal renewals and contracts. According to new data from financial information group Moneyfacts, UK two-year fixed-rate mortgages for residential properties increased from 5.98% to 6.01%, which hasn't been recorded since December 2021. As a result, the number of residential mortgage products available has also seen a marked decline, reducing from May 1st's 5,264 to 4,683.
The Broken UK Mortgage Market
The past nine months experienced explosive upheavals for the mortgage and housing sector in the UK, with many experts equating the events to the UK financial crisis in 2008. Martin Stewart, Director of Mortgage Advisory London Money, noted that the market is becoming dysfunctional, and the consequences could be severe for borrowers. Stewart cited real-life examples whereby clients were queuing alongside thousands of others waiting to secure a mortgage deal.
The Current State of UK Mortgage Rates
The current average mortgage rate of a five-year plan is 5.67%, according to Moneyfacts. Borrowers continually struggle under the significant increase in mortgage rates, and experts predict worse is yet to come.
The Government's Response
The media questioned the UK Prime Minister, Rishi Sunak, concerning the government's upcoming support for struggling UK households amid the economic crisis. Sunak's response was that there would be no changes to the collective plan other than ensuring that inflation is cut by half.
The Magnitude of the Crisis
Lenders such as Santander and HSBC are among the many financial institutions that have had to temporarily suspend their mortgage product offerings due to increased market uncertainty. However, this pales in comparison to the effect the potential magnitudes of the mortgage crunch could cause, according to Viraj Patel, Senior Strategist at Vanda Research. Patel believes that out of all the households in the UK, approximately 50% of them still need to remortgage.
The Long-Term Hazardous Effects of Monetary Policies
Patel also adds that although the Bank of England is now fully aware of the current circumstances, there is a genuine risk of more defaults if the second-round effects of economic uncertainty continue to cripple the country's housing market. Experts warn that the worst of the crisis is yet to come, and consumers will overextend themselves, potentially causing a spiral effect in non-housing credit.
The Dire State of the UK Economy
With UK inflation rates remaining among the highest among developed economies at 8.7%, financial service providers, including the Bank of England, are warning of further dramatic long-term effects on the UK economy. Although there has been positive news from the economic forecast of the UK, the current personal finance decisions of UK borrowers could still have significant macro impact on the UK economy.
The soaring mortgage rates across the UK housing sector and the economic fallout it is causing certainly raises concern for new businesses looking to enter the housing and mortgage industries. With lenders like Santander and HSBC suspending their mortgage offerings due to market uncertainty and potential defaults looming, it may not be the best time for a startup company to enter the market. The dysfunctionality in the market and the potential for a spiraling effect in non-housing credit could have severe ramifications for the UK economy in the long term. As a new business, navigating the uncertainty and risky landscape of the UK housing market could be a challenge. Furthermore, the lack of government support for struggling UK households amid this economic crisis raises additional concerns. It may be important for new businesses to wait for signs of stabilization in the industry and explore different areas of the economy before considering entering the UK housing market at this time.