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Mortgage Rates Rise to 'Scarily High' Levels After UK's Week of Chaos

According to Bank of England data, the average rate for two-year loans at 95% of the home’s value hasn’t surpassed 5.4% since 2008. This is a great option for those looking to finance their home with a low-interest loan.

September 30, 2022
7 minutes
minute read

UK lenders are offering mortgage rates that are lower than they have been in over 10 years. This is in response to the current market conditions, which have caused upheaval in the housing market.

HSBC Holdings Plc is advertising a two-year fixed-rate deal with 95% loan to value at 6.64% on Friday. This is a similar deal to what First Direct, a division of HSBC, has on offer for 6.24%. Nationwide Building Society was advertising two-year fixed rate deals for 95% LTV at 6.19%.

According to Bank of England data, the average rate for two-year loans at 95% of the home’s value hasn’t surpassed 5.4% since 2008. This is a great option for those looking to finance their home with a low-interest loan.

Ray Boulger, a manager at loan broker John Charcol, said that most people would think 6.5% to 7% would be scarily high. He said that first-time buyers are often the ones that have to borrow at 95% LTV, and they will be the ones most badly hit by the interest rate increase.

Rates for 95% loan-to-value mortgages are currently limited to a small corner of the market. According to Bloomberg Intelligence, these mortgages made up a fraction of all mortgage lending in recent years. On Thursday, banks were typically offering rates of 4-6% for 75% loan-to-value mortgages.

It's been a wild week for the housing market, with some sales collapsing and mortgage costs soaring. According to Bloomberg Economics, the average monthly cost of a two-year fixed-rate mortgage could increase by 70% by March from January.

The possibility of 7% rates is raising eyebrows among brokers. This is because the role of 7% rates in helping regulators determine whether firms can withstand financial calamity is coming under scrutiny.

In 2014, the Bank of England's Financial Policy Committee implemented a requirement that lenders test whether borrowers could withstand prices at 3% more than the reversion rate in their mortgage contract. This practice was ended in August, replaced by other tests.

The average cost of taking out a mortgage is expected to continue to rise in the coming months. This is due to a number of factors, including the increasing cost of housing and the tight lending market.

The 7% level is also a key element of the Financial Conduct Authority’s regime. Under FCA rules, banks stress test whether mortgage borrowers can withstand rate rises as part of their affordability checks. The FCA typically uses a rate between 6% and 7% for this test, according to a person familiar with the matter.

The representatives for HSBC, the FCA and the BOE declined to comment when asked about the matter. First Direct and Nationwide did not respond to emails seeking comment.

According to Andrew Montlake, managing director at mortgage broker Coreco, any interest rate above 6% is significant. He warns that people who are re-mortgaging will experience a significant increase in their monthly payments.

The recent surge in mortgage rates could have a significant impact on the housing market, with many buyers potentially shelving their plans if they haven't already secured lower rates. This could lead to a sharp decline in transactions, with prices more vulnerable to larger movements.

Iwona Hovenko is an equity research analyst who has experience in the financial industry. She has worked in various roles including investment banking, equity research, and asset management. Iwona has a strong understanding of the financial markets and is able to provide insights on various companies and industries.

The current level of mortgage debt is already causing concern in the market. Ian Wyn-Jones, director of Ian Wyn-Jones Estate Agents in north Wales, said he had seen up to 18 sales collapse this week, costing him £20,000 ($22,282) to £30,000 in fees.

"This is a nightmare for many of our customers," he said by phone. "We're talking about families with children starting high school, families of three or four living in a four-bedroom property. It's a horrible situation for most people."

Cathy Hills
Associate Editor
Eric Ng
John Liu
Editorial Board
Bryan Curtis
Adan Harris
Managing Editor
Cathy Hills
Associate Editor

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