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Heavily-mortgaged generation will pay the price for UK's rate crisis

Kwasi Kwarteng's freewheeling statement contained debt-funded tax cuts and big spending measures in a growth spurt, but it came out of a budget and unreported by the OBR

The events of the past week have been stunning as Britain moved from tough financial times to full-scale intervention by the Bank of England.

The UK economy does not exist in isolation and much of the rest of the world is also affected by the inflationary storm and the strength of the dollar, but it is impressive to shoot itself in the foot to the point of triggering its own mini financial crisis.

It tends to pay off if you can keep a cool head when all the reviewers around you are losing theirs, so I’m going to take it easy on the hyperbole and let the list speak for itself: falling pound sterling, soaring gilt yields, pension fund collapse fears and mortgage chaos.

Kwasi Kwarteng's freewheeling statement contained debt-funded tax cuts and big spending measures in a growth spurt, but it came out of a budget and unreported by the OBR

Kwasi Kwarteng’s freewheeling statement contained debt-funded tax cuts and big spending measures in a growth spurt, but it came out of a budget and unreported by the OBR

Kwasi Kwarteng’s freewheeling mini-budget debt-funded tax cuts aren’t solely to blame for the predicament we find ourselves in – the confused Bank of England over the past year must also take some of the blame.

However, as disappointed as some corners of the markets have been with the 0.5 percentage point rise in the base rate to 2.25% last week, compared to the larger 0.75 percentage point rise in the Fed, it’s hard to see how this would have happened without the events of Friday.

Kwasi’s growth ideas may be the kind of stuff we need to lift Britain out of its post-financial crisis rut, but the problem was delivery.

Announcing such a bombardment of tax and spending cuts outside of a budget, or even a fall/spring statement, was unorthodox; doing it while funding it with debt and no OBR report on the side was insane.

Line that up with inflation at 9.9% and questions hanging over the performance of the Bank of England’s monetary policy – ​​and even its independence – and you have a recipe for your bold plans to massively backfire. .

Trust is hard to win and easy to lose and much faith in Britain’s prudent ability to manage its finances has been wasted.

Back in the days of the financial crisis I used to rat out one of our reporters for his excessive use of the word carnage – but the last few days have been pretty carnage

This culminated in the intervention of the Bank of England yesterday, with an emergency bond buying operation in the gilt market which we explain here.

The Bank will buy long term UK government bonds to try to stabilize the market and prevent spiraling yields (government bonds are supposed to be the boring, stable part of the market, remember).

The catalyst for this has been reported to be fears of pension fund collapse as late-career salary schemes invested in complex derivatives-related liability-related investment funds have faced huge fundraising appeals.

The aftermath of the fiscal mania has seen the pound plummet, UK borrowing rates soar and led to forecasts that the base rate could now be hiked to as much as 6%

The aftermath of the fiscal mania has seen the pound plummet, UK borrowing rates soar and led to forecasts that the base rate could now be hiked to as much as 6%

Hopefully the Bank’s action will work and also help stabilize the mortgage market, where borrowers have seen rates soar – adding hundreds of pounds a month to payments for those in the unfortunate position of having to remortgage .

I spoke this week to borrowers whose monthly bills are rising by £400 or £500 because they got cheap fixed rate deals two or five years ago and are now facing much higher rates.

To put that into context, at the start of the year Nationwide had a five-year fixed rate at 1.49%, after its review this week the building society’s five-year fixed rates start at 5.19% . On a £250,000 25-year mortgage, that’s the difference between paying £999 a month and £1,489, or £490.

Many of those whose mortgage repairs end anytime in the next two years are very concerned about the payment shock they face, but the most pressing scenario is for those whose deals end in the next three to six years. month.

Not only are they looking at much higher rates a barrel, but they’ve also seen swaths of lenders walk away from deals or pull out of the market for new business this week, creating a sense of panic.

There’s no need to panic, as we explain in our guide What to do if you need a mortgage, the brokers we spoke to this week assure us that deals are available, but they add that rates are changing rapidly and that call volumes are running very high.

Normally when the Fear Gauge is up it’s the worst time to try and do something, but for those who need to get a mortgage the problem is that there are also predictions that the Bank of England may now have to raise the base rate to 6.25. percent.

I wonder if he could ever get there before the severe financial hardship inflicted on people increases. But I also never expected rates to rise as quickly as they have this year – and I spent years advocating for rate hikes when the Bank stalled.

Homes are more expensive relative to income than they've ever been, but the message from many in the financial industry is that it doesn't matter because mortgage rates are low - now they're skyrocketing and borrowers were caught off guard

Homes are more expensive relative to income than they’ve ever been, but the message from many in the financial industry is that it doesn’t matter because mortgage rates are low – now they’re skyrocketing and borrowers were caught off guard

Borrowers have every right to feel hurt around here, because they’ve spent years getting reassurance from central banks that when rates do rise, it will be slow and gradual.

Instead it turns out the climb was delayed too long and then the hikes were done rough and fast.

Borrowers have spent years getting reassurance from central banks about when rates would slowly and gradually rise. Instead it was rough and fast

I’ve spent years writing about mortgages and house prices and have regularly posted updated versions of the graph above, showing house prices versus wages.

This illustrates how, even after the financial crisis, real estate values ​​never returned to their long-term average and how the ratio has exploded since 2012.

Houses are more expensive relative to income than they have ever been and it is abundantly clear that unless wages start to rise significantly this would be a problem when interest rates start to rise.

Others have regularly expressed this same concern, but it has been firmly dismissed as a non-issue by many in the financial industry.

The message from those who are supposed to know is that it doesn’t matter because mortgage rates used to be low and monthly payments affordable – now they are skyrocketing and borrowers are getting hammered.

Will we see banks, building societies, other financial companies or even regulators raise their hands and say, “Sorry, we got it wrong? I seriously doubt it.

This will lead to a new episode of intergenerational inequality, as it is the generation of heavily mortgaged homeowners in their 40s, 30s and 20s who face the pain.

This person in the example above with the £250,000 mortgage could be someone earning £60,000 a year. They are looking at almost £6,000 a year in extra mortgage payments and that will eat up £10,000 a year before tax of their income just to cover the extra costs of staying in their house at higher rates.

I know many readers of this article will recall the homeownership troubles of the early 1990s and ironically dismiss complaints about 5% mortgage rates.

Yet house prices were lower than wages then and if you adjust to affordability, much lower rates are needed to bring the same pain today.

This Sky’s Ed Conway Adjusted Accessibility Rate Tablebased on research by Neil Hudson of BuiltPlace, illustrates this point, showing that today, rates of 6% would result in a mortgage burden similar to the double-digit rates of the early 1990s.

Let’s hope that the Bank of England and the government will quickly get this situation under control. In the meantime, This is Money will keep you up to date on what you need to know and what it means to you.

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