Kwasi Kwarteng is set to meet with the UK’s bank and building societies after the mortgage sector took a blow following the government’s mini-budget announcement.
The chancellor will meet with high street lenders and some of the largest challenger banks ahead of plans to loosen regulation in financial services.
In his first mini-budget, Chancellor Kwasi Kwarteng proposed a range of tax-cutting measures that were estimated to cost the treasury £37bn.
Kwarteng’s mini-budget raised havoc in the financial sector, causing lenders to withdraw 40% of their deals last week. However, many lenders have re-entered the market, but this time with much higher rates.
Despite the government’s 45p tax U-turn announced on Monday — which many hoped would create less volatile market conditions and mortgage deals — the housing market has gone into turmoil.
Daniel Mahoney, UK Economist at Handelsbanken, comments: “Interest rates reaching 6% will cause major issues in the housing market: for example, it is estimated that around one third of households on fixed-rate mortgages will need to re-finance within two years. We therefore do not expect interest rates to reach current market expectations. That said, we still expect significant monetary policy tightening that will have a material impact on the UK housing market.”
The meeting is partially a response to the news that two-year and five-year fixed mortgage rates have increased to over 6%, the highest it has been in 14 years. To put this increase into perspective, the average rate for two-year rate was 2.34% at the start of December.
The last time two- year fixed mortgage rates reached 6% was in November 2008 at the start of the financial crisis — hinting at the firm nature of an upcoming recession. While the last time a five-year fixed rate was at 6% was in February 2010, when this was a typical rate.
As a result, hiked mortgage rates will leave property owners paying hundreds more.
The Centre for Economics and Business Research commented on the rate increases: “With average mortgage rates set to reach more than 20-year highs by mid-2023, and stagflationary pressures set to reduce real earnings further, affordability will worsen next year.
“Accordingly, annual house price growth is expected to enter negative territory during the first half of 2023, with an overall annual contraction of 3.9% expected across the whole year.”