JUST when you thought it was safe to get back in the mortgage market, a fresh shock has hit like a wave.
The bond markets are chaotic, Britain’s borrowing costs have surged and lenders are hiking their rates again, with a rise of up to 0.45 percentage points from Nationwide, the country’s biggest building society.
Just when you thought it was safe to get back in the mortgage market
Under Truss, it was the PM and Chancellor who made investors afraid with unfunded tax cuts, this time it’s the Bank of England and hapless Governor Andrew Bailey
So what’s going on? And whose fault is it this time?
Last autumn’s mini-Budget horror show during the disastrous Liz Truss premiership spooked investors about the UK’s stability.
This led to Government bonds becoming more risky and borrowing costs rocketing, pushing up mortgage rates in what was called a “moron premium”.
A bit of political calm — achieved by the much steadier stewardship of PM Rishi Sunak and Chancellor Jeremy Hunt — led the markets to believe that interest rates had peaked, stabilising the cost of Government borrowing.
Indeed, the markets — which were predicting rates of six per cent under Truss — revised their peak forecasts down to a much less painful 4.25 per cent.
Too cautious
And homeowners felt confident enough to gamble on taking out a tracker mortgage in the hope the monthly payments would soon dip back down.
This week, however, that optimism has been swept away by disappointing inflation figures.
Yes, overall inflation has started to come down, from 10.1 per cent to 8.7 per cent.
But this was still well above the 8.2 per cent economists had predicted.
And the missed target was made even worse by figures showing that core inflation — which strips out more volatile energy and food prices — was still rising, to 6.8 per cent.
“Inflation is slowing but people are still getting worse off, just a bit slower than they were,” says Michael Hewson, market analyst at CMC Markets. And he added: “It’s a bit like Chinese water torture.”
What is different this time, compared to last autumn, is exactly who and what the markets are alarmed by.
Under Truss, it was the PM and the Chancellor who made investors afraid as they made unfunded tax cuts while spending wildly on the energy support package.
This time it is the Bank of England and its hapless Governor Andrew Bailey.
In short, investors remain unconvinced by the Bank’s plan for bringing inflation fully under control.
The next Bank of England meeting on June 22 was meant to be a non-event.
But it is now expected to set another hike, from 4.5 per cent to 4.75 per cent at least.
Mr Bailey — while admitting the Bank has much to learn from the recent turmoil — has pushed back against criticism that he was too slow to react to inflation eating people’s cash. But many disagree.
In November 2021, as the world faced post-Covid shortages and supply problems, inflation was tracking at six per cent.
The Bank, wrongly thinking it a blip, was too cautious in using its biggest weapon — raising rates — to tackle inflation.
Its first move was to inch them higher by just 0.15 per cent, compared to the US Federal Reserve which landed a punch with a 0.75 per cent increase straight away.
“The Bank took a knife to a gunfight, and if you don’t go in hard and fast you prolong the agony”, said Hewson.
Now, despite a string of repeated belated rate rises, inflation remains “sticky” and there is a lack of confidence in when it will come down.
The signals from the Bank remain muddled, with mortgage holders paying the price because of the subsequent increase in Government yields. Yields — the amount of interest they pay out — rise when they are seen as more risky because investors want a bigger reward for owning them.
These bonds — known as gilts — are crucial to the economy because banks use them to work out borrowing costs for households and businesses.
As a result of the past week’s turbulence, a ten-year Government bond yield has increased from 3.7 per cent to 4.3 per cent. By comparison, that bond was at 4.6 per cent in last October’s mini-Budget market meltdown.
As Simon French, economist at Panmure Gordon, said: “Worryingly, the UK’s ten- year sovereign yield is now the highest in the G7. This didn’t even happen during the mini-Budget in late 2022.”
All of this has a real-world impact on how much our home loans cost.
With interest rates now expected to be pushed up to five per cent, a homeowner who had fixed a two-year £200,000 mortgage in 2021 now faces a £561-a-month increase in their monthly payments.
Touch and go
A household with a £100,000 mortgage needs to find an extra £264-a-month compared to what they paid two years ago.
While people fret over how to balance the books, the Government is worried about how inflation will pan out after Rishi Sunak promised to halve it by the end of the year. Jeremy Hunt yesterday even said he would accept pushing the country into recession with higher rates if it meant tackling runaway inflation.
Jeremy Hunt has even said he would accept pushing the country into recession with higher rates if it meant tackling runaway inflation
At the time of the Prime Minister’s pledge, inflation was at 10.7 per cent and was seen as an easy goal to score. But with food prices still at a 45-year high and the Bank’s interest rates bazooka pro- ving ineffective, it now looks touch and go.
Economists warn that raising rates again will lead to further consumer pain and could even push us into a recession. The question is how much does the Bank want to harm the economy before it recovers?
What is better, a short-term pain and recovery or a long slog wading through treacle?
Unfortunately, the 1.4million households who have to remortgage this year will be hit in the pocket either way.
Did you miss our previous article…
https://hellofaread.com/money/inside-the-incredible-coastal-mansion-that-could-be-yours-for-just-10/
