Virgin Money and Skipton Building Society have pulled all their mortgages for new customers in response to the pound falling to a record low yesterday.
Halifax is also due to withdraw its fee-paying mortgages – which tend to have lower interest rates – this evening and some other smaller lenders have also followed the same tactic.
But why does the plummeting value of the pound impact mortgages? And what will it mean for our finances and indeed our mortgages and the housing market? We take a look.
Why are mortgage lenders pulling their deals?
Let’s go back to last Friday – the new Chancellor Kwasi Kwarteng announced his ‘mini-budget’ which included huge tax cuts to be funded through high-cost borrowing.
The result of this was, on Monday, the pound fell and financial markets were well and truly shaken.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown explained: “The dramatic fall in the pound on Monday led to fears of inflation – because the price of anything that’s imported will rise.
“As a result, it led to expectations that the Bank of England would hike rates to try to bring it back down again.
“For a while yesterday, there were expectations of a swift emergency rate rise. Traders then started pricing in a series of rate rises to 6% – bolstered by a statement from the Bank that it would be bold in its efforts to bring inflation back down to the 2% target.”
Although the interest rate rise had not happened, mortgage lenders adjust the rates of their fixed-rate mortgages based partly how high rates might climb.
David Hollingworth, associate director, communications at L&C Mortgages, said: “Lenders will be trying to get to grips with the knock on effect of the market’s expectation that rates will have to rise harder and faster. That will affect lender funding costs and therefore feed through to fixed rates.”
By pulling mortgages from the market, they are giving themselves time assess how these deals should be priced.
Sarah added: “Major mortgage players are hauling in the sails after the wind changed.
“The dramatic overnight hike in market expectations of future rates has ramped up the cost of doing business, and lenders are taking a break to reassess and reprice.”
What does lenders pulling mortgage deals mean for you?
This news will impact those borrowers who are taking out a new deal – so, this means first-time buyers, home movers or those remortgaging.
For these customers there will now be fewer mortgages from which you can choose, but also rates will be rising.
Sarah explained: “Someone who fixed for 2% two years ago could be looking at a remortgage rate at 5% by next week.
“If they had a £200,000 mortgage over 25 years, that’s a rise in monthly payments from £848 to £1,169 – or £321. That’s a huge amount of extra money to have to find each month on top of everything else.”
Sarah’s advice is, if you have six months or less to run on a fixed rate mortgage, it’s worth shopping around for a new rate, because you can lock in a deal up to six months in advance and protect yourself from rises.
“Given the market turmoil, you may want to talk to a mortgage broker who is across the market and can track down the best rates,” she added.
How will this impact the property market?
With soaring mortgage rates, there will naturally be an impact to the housing market and many people have been raising the question of whether plummeting pound and subsequent mortgage withdrawing might lead to a housing market crash.
Karen Noye, mortgage expert at Quilter, said: “Rates of 6% could prove disastrous for the property market as people simply won’t be able to afford their mortgage payments if they have overstretched themselves.
“This could cause a wave of properties come to market just when demand is drying up. House prices will naturally come down if this happens.
“However, we are still suffering a severe lack of stock in the market and an ever increasing population of renters wanting to buy so house prices may not see a severe crash but a downturn is very likely in the short term.
“The stamp duty cut will also help keep demand in the market but how much is yet to be seen considering the economic backdrop many people are trying to cope with.”
