The British in the trap with variable interest mortgages

She thought she was out of it. At thirty-one, after years of saving, Sophie Walker managed to buy her first home in June 2021, a small two-bedroom apartment in Leith, the recently trendy district of Edinburgh (Scotland).

At the time, the interest rate on his mortgage was 2.4%, bringing his monthly repayments to £700 a month. A largely affordable amount for this Scottish teacher paid £2,200 net per month.

Since then, Britain has experienced a real financial panic and mortgage rates have exploded. For Sophie, the joy of being an owner has given way to a dull anguish. Because the teacher got into debt for a course that was only guaranteed for two years.

In six months we will have to say goodbye to the 2.4% and accept a higher rate. How much? His advisor can’t tell him that at the moment. But according to the young woman’s calculations, her new monthly payment could reach £1,300, almost double the current one.

“I can’t sleep at night and I have panic attacks. My job doesn’t allow for a promotion, and with the cost of living skyrocketing, I can’t save any more.” she sighs. Currently, the 30-year-old is considering reselling his property or finding a roommate to sublet his second bedroom.

Sophie’s case is far from isolated. In the UK, almost 8 million people have taken out a bank loan to buy their home. And unlike most countries – including France – mortgage interest rates are most often variable and therefore subject to (macro)economic risks.

80% of the loans are at interest rates that could be described as “semi-fixed”, in the sense that they are stable over periods defined in advance (for example, 2 years, 3 years or 5 years). According to financial reporting group Moneyfacts, these fixed-rate mortgages are averaging around 6%, up from 2.4% in October 2021. For the 2 million people who will have to renegotiate their contracts by the end of next year, these figures are therefore staggering.

A social bomb

The rest of the contracts are directly variable, i.e. directly indexed to the Bank of England interest rate, which itself changes every month. Here, too, the situation is worrying. On November 3, the Bank of England’s Monetary Policy Committee (BoE) raised the key rate by 0.75 basis points, the largest increase since 1989.

In one year, the latter rose from 0.1% to 3%, the highest level since 2008. For some households, this equates to several hundred extra pounds each month. According to the anti-poverty association Joseph Rowntree Foundation, almost 400,000 people could thus sink into poverty in the coming months due to the explosion of mortgage loans.

The real explosion came with the announcement of short-lived Prime Minister Liz Truss and her Finance Minister Kwasi Karteng’s ‘mini-budget’

How did Britain get here? The reasons are several. Across the Channel, like everywhere else in the world, the post-pandemic economic recovery combined with the war in Ukraine has led to high demand for energy and raw materials and therefore to high inflation.

Faced with this observation, the Bank of England began raising its key rate (the rate at which it lends money to commercial banks) in December 2021 to cool the UK economy and bring down prices. “In anticipation of this increase, lenders raised mortgage rates from November 2021. Until then, they were at historic lows, with some contracts even offering interest rates up to 1. % »emphasizes David Hollingworth, from the brokerage firm L&C.

But the real explosion came with the announcement of short-lived Prime Minister Liz Truss and her Finance Minister Kwasi Karteng’s “mini-budget”. On September 23, the government announces significant tax cuts for the richest as well as the establishment of a large energy tariff shield, but without explaining their financing.

Very soon after the announcement of the budget, interest rates on government bonds jumped under the impact of investor panic, with a direct impact on the real estate market. For a few days, hundreds of property offers are withdrawn from the market by commercial banks as they recalculate them upwards.

The entire property market was affected

Since then, things have calmed down a bit. Liz Truss has been replaced by Rishi Sunak, whose new Chancellor Jeremy Hunt has just announced a sweeping austerity plan. With the financial markets calmed down, property loans have therefore fallen somewhat. A little less worried than two months ago, the British are still on their guard.

“At the height of the panic, everyone wanted to renegotiate before it was too late. Now it’s a little different: our customers are waiting, they don’t know whether to wait for fixed-rate mortgages to go down or choose a variable-rate mortgage, which is definitely lower at the moment, which is likely to go up again »explains David Hollingworth.

The first signs of falling property prices are emerging in the UK

Especially since the agony of difficult month-ends is still there. In the UK, inflation is now 11% and energy, fuel and food prices are still sky high. Due to the uncertain economic context, banks are also more reluctant to lend money.

“We have a client who was close to becoming a homeowner when his bank abruptly denied his mortgage »says Rosa Fappiano, an employee in the sales department of an estate agency in Edinburgh.

As a result, the first signs of falling house prices are emerging in the UK. According to the National Building Society, housing costs fell in October for the first time since July 2021.

“In Edinburgh, homes used to sell out in a few days when demand was high, now we have offers that stay on the market for weeks. Owners who previously tended to overvalue their properties can no longer do that.”emphasizes Rosa Fappiano.

For Brits who can buy homes without taking out a bank loan, this is a godsend. For the tenants, on the other hand, the bill will probably be high, as owners who have taken out a mortgage may be tempted to raise the rent. Enough to deal a new blow to the portfolio of homes that are already hard hit.

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