UK lenders pledge to 'help with anxieties' in face of mortgage time bomb

Some of the UK's biggest mortgage lenders said they were “doing they can” to help homeowners facing soaring loan payments, following a hastily called meeting with Chancellor Jeremy Hunt on Friday.

“We had a very productive meeting. We're doing everything we can to help customers and help with the anxieties,” said NatWest Group chief executive Alison Rose.

Described as a “good working discussion” by Lloyds Bank chief executive Charlie Nunn, the meeting came a day after the Bank of England raised interest rates by 0.5 percentage points to 5 per cent, the 13th successive rate hike.

Others at the Chancellor's meeting included Barclays chief executive Matt Hammerstein, Virgin Money boss David Duffy and the chief executive of Nationwide Debbie Crosbie.

Mr Hunt said he had made some "important" agreements with lenders, adding that there were two groups of people whom those at the meeting were concerned about.

"The first are people who are at real risk of losing their homes because they fall behind in their mortgage payments," he said.

"The second are people who are having to change their mortgage because their fixed rate comes to an end, and they're worried about the impact on their family finances of higher mortgage rates."

Mr Hunt added that the lenders had agreed to "three very important things".

"The first is that absolutely anyone can talk to their bank or their mortgage lender and it will have no impact whatsoever on their credit score. That's really important. A lot of people worry about that.

"The second is that if you are anxious about the impact on your family finances and you change your mortgage to interest-only or you extend the term of your mortgage and you want to go back to your original mortgage deal, within six months, you can do so, no questions asked", he said, adding: "That, I think, is going to give people a lot of comfort".

"The final thing is for people who are at risk of losing their home", Mr Hunt continued, noting that "banks and mortgage lenders have a number of things in place" for such cases.

"The last thing that they want to do is to repossess a home, but in that extreme situation they have agreed there will be a minimum 12-month period before there's a repossession without consent."

Talk of a 'ticking time bomb' in the mortgage market has been around for months, and was repeated in the House of Commons this week by Jake Berry, the influential chair of the Northern Research Group of Tory MPs.

“People are very concerned about what is being described as the mortgage bomb about to go off,” he said.

For some analysts that time bomb has already gone off.

Financial markets have now priced in a prediction that interest rates will hit a high of 6 per cent by the end of the year, amid warnings that 1.4 million mortgage holders will lose at least a fifth of their disposable income in additional repayments.

There are many rocks and many hard places in the British economy and politicians, mortgage lenders, the Bank of England and homeowners are caught between them all.

Many economists see what's happening today and what's predicted to happen over the next two years at least is the end game of the era of “cheap money” when interest rates were low and the Bank of England was essentially pumping money into the economy by way of quantitative easing.

In addition to this, to stop mass unemployment the government instituted a furlough scheme during the covid pandemic.

On top of that, more money was pumped into the economy in the form of relief on gas and electricity energy bills, as the price of energy soared following the Russian invasion of Ukraine.

All this extra cash sloshing around the economy began to chase prices higher and inflation soared.

However, as illustrated by Friday's retail sales figures and strengthening consumer confidence, there is still pent-up demand left in the economy, which is leading to “sticky” inflation.

The Bank of England works on the assumption that as interest rates rise, mortgage-holders have less disposable income, are incentivised to save more and put off taking out new loans.

The trouble is, if the Bank of England raises rates by too little, the demand remains and inflation won't budge. Too much, and the economy can be tipped into recession.

Conservative Party MP John Baron told LBC radio this week that the Bank of England was “out of touch with reality” and “behind the curve” on inflation.

Samuel Mather-Holgate of Mather and Murray Financial said Thursday's rate rise to 5 per cent “will tip the UK into a severe, protracted recession”.

“These rate rises have battered homeowners and renters, as mortgage rates push up rents,” said Mr Mather-Holgate.

'Ticking time bomb'

Other analysts forecast bleak times ahead.

“The ticking time bomb has finally exploded with devastating consequences for borrowers, renters and business owners,” said Amit Patel, at the mortgage broker Trinity Finance.

“By hiking the base rate to the highest level for 15 years, the Bank of England will now effectively force the UK into a recession.

“Real pay for the majority of people in the country has been flat and, due to the rising cost of living, their disposable incomes has significantly reduced, so I cannot see them as being responsible for pushing prices up.

“Fundamentally, there are three reasons why inflation is stubbornly high: Brexit, profiteering by banks, energy companies and in the food supply chain, and the Bank of England,” said Mr Patel.

Market reaction

The possibility that the UK could tip into recession hit both the London stock market and the British pound on Friday.

“A larger than expected 0.5 per cent rise in interest rate split opinion once more between those who believe that the Bank of England had little choice but to enforce a hike immediately, rather than in dribs and drabs, and those who are expecting recession as inevitable as rate rises choke what is already tepid growth,” said Richard Hunter, head of markets at Interactive Investor.

Sterling fell by as much as 0.5 per cent against the dollar on Friday morning to a low of $1.2685. Even though it recovered some ground, it is still set to have dropped by 1 per cent this week – it's biggest fall since May.

“What has been interesting has been the pound's reaction,” said City Index markets strategist Fiona Cincotta.

“Normally, a G10 major central bank going for a jumbo rate hike, you'd expect a jump in sterling. But the fact that it's come off is just a reflection of those [recessionary] fears.

“Fears of a recession are going to ramp up from now on and that is going to limit sterling's potential, especially when you've got Fed Chair [Jerome] Powell sounding hawkish as well, so there isn't going to be any respite coming from a weaker dollar.”

Mortgage nightmare or scaremongering?

Meanwhile, the opposition Labour Party has urged the government to order the lenders to offer further support to mortgage payers, such as temporarily allowing struggling borrowers to switch to interest-only payments or lengthen their mortgage period.

Many mortgage brokers have seen an increase in people coming to them for advice as their two and five-year fixed rate mortgages come to an end, and they face the prospect of a huge leap in their monthly payments.

“My inbox is full of people worried and wanting to do something,” Justin Moy at EHF Mortgages told The National.

More than 80 per cent of homeowners with a mortgage are on fixed-rate deals, according to trade association UK Finance.

Around 2.4 million of those fixed rate deals are due to expire before the end of next year. Any new deals will be at rates considerably higher than they were when the original deals were signed.

According to MoneyFacts, the average two-year fixed residential mortgage rate was 6.19 per cent on Friday, the same average rate as on Thursday.

The average five-year fixed residential mortgage rate today is 5.83 per cent, up from 5.82 per cent on Thursday.

However, many mortgage brokers feel there's much scaremongering going on about rates and the state of the mortgage market.

“While the data is true, it's misleading and should always be caveated. There is no such thing as an average customer or average circumstances,” said Craig Fish at Lodestone Mortgages and Protection.

“Just this week we quoted 5.34 per cent to a customer, and a rate starting with a four for a buy-to-let customer. These 'averages' are used to generate headlines, and serve no purpose other than creating panic.”

Rob Gill, managing director at Altura Mortgage Finance agrees: “Borrowers should treat average mortgage rate data cautiously, as the reality is often very different.

“With the average two-year fixed rate currently reported as over 6 per cent, several lenders still offer equivalent rates of around 5.3 per cent for the right borrowers.

“While the average data may reflect the trend accurately, the figures themselves are often misleading,” said Mr Gill.

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