UK banks are building reserves to cope with mortgage crisis
UK banks are building reserves in anticipation of a large number of defaults that are set to hit the UK property market.
Interest rates
Interest rates have risen considerably this year. Currently, interest rates stand at 2.65%. This represents a rise of 2.55% already, with further rate rises expected soon. The markets are projecting a further rate rise of 0.75% at the next Monetary Policy Committee meeting as the BoE fights to tackle rising inflation.
Most market analysts are predicting that it will continue to get worse in the ensuing months as interest rates will need to continue to rise to curb inflation. It is expected that interest rates could rise to 5% at some point in 2023.
Why is this important?
As interest rates rise, lenders are forced to increase their lending rates to retain profits. This includes mortgages. The knock on effect is it will cost borrowers a lot more money to service their mortgage loans. This is potentially dangerous for many borrowers who have a lack of liquidity already due to escalating living costs caused by inflation.
To compound the issue mortgage lenders are introducing mortgage rates far higher than the base rate for fixed rate deals. This is because they expect interest rates to rise a lot higher. This is why we have seen mortgage rates hit 14 year highs for new fixed rate deals. Consequently, many people’s mortgage offers have been pulled.
Bank reserves
Spanish lender Santander, which has a big presence on UK high streets, has announced that it has injected £138m into its war chest to deal with a rise in borrowers not paying their debts in the last three months.
Santander is not alone. Barclays have also announced that they have added £81m in loan loss reserves in the last three months as well. Other banks are following suit.
Despite this bank, profits are up in the preceding 12 months. Barclays’s group profits hit £1.97bn, up six per cent. Asia-focused lender Standard Chartered registered a 40 per cent profit jump compared to last year. Whilst Santander’s group profits climbed three per cent to €2.42bn (£2.11bn).
Inflation
Inflation is currently at 40 year highs and it is anticipated to rise further still with the markets projecting that inflation could peak at 13% before coming back under control.
This cost of living crisis will be expected to peak in 2023 and some people will be unable to meet their mortgage obligations and could lose their homes. This could be exacerbated by the forecasted slow down of the economy.
How will this affect the UK property market?
The UK property market is anticipated to dip in 2023. But the situation is not as grim as many journalists are projecting in the media.
Yes, rates are rising and affordability at the bottom of the market is preventing many would be home buyers from getting on the housing ladder. However, many people have considerable equity in their homes and are not looking at selling, as they have the reserves to ride the storm.
Stamp duty relief
The government has reduced stamp duty to stimulate the property market. Currently, there isn’t any stamp duty on the first £250,000. This is up from £125,000 previously. For first time buyers, there is no stamp duty to pay on the first £425,000. This is up from £300,000.
Mortgage affordability
The Bank of England has recently removed the stress test for lenders. Lenders now don’t have to test the affordability of borrowers if interest rates rise. This was introduced by the BoE in August, to stimulate the housing market in response to rate rises. This means there is more mortgage availability for borrowers.
Supply imbalances
There is still a significant shortage of housing stock, as the UK simply has not built enough homes in the last two decades. Furthermore, many investors are investing in the UK property market. Currently, 20% of UK homes are owned by property investors. This is pushing up rents, which means people have to pay more for accommodation irrespective of whether they rent or buy.
Some positivity emerges
The old adage of 24 hours is a long time in politics is ringing true. Mortgage rates have dipped as the markets feel that the UK now has a more trusted hand who is leading the economy. In a recent article, we explained why the UK property market is still a good long term investment.
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