Mortgage rates: The full pain of this chaos is yet to come

In the run-up to this week’s shock interest rate rise, BBC News spoke to dozens of people facing inconceivable rises in mortgage costs. There is no shortage of volunteers telling their stories.

“My monthly mortgage repayments increased by £270 per month.”

“It’s scary. Petrifying.”

“Several hundred pounds.”

“I don’t sleep well at night. Distraught. I’m helpless.”

This was the week where inflation became stuck, the Bank tried to get a grip, Number 11 advisers warned of the need to “create a recession”, and an inflation blame game erupted, all against the backdrop of household mortgage horror.

I was struck therefore on a visit to a Brighton mortgage broker, firstly by the response that these rises were indeed conceivable and conceived of in the “Key Facts Illustration” required in mortgage applications.

This form illustrated the repayments required should interest rates hit a 20-year high. They are currently at their highest for 15 years. And secondly, the broker, Iain Carter, told me of the almost automatic recourse to extending clients’ mortgage terms.

It is now possible, he told me, to stretch terms for some clients, so that the loan term ends when they are aged 80. So that is mortgages lasting four decades. Certainly since 2007, the concept of a term of over 30 years, once a rarity affecting less than a fifth of first time buyers, is right now the norm for more than half of buyers.

For someone with a mortgage of £200,000, extending the term from 25 to 33 years, could knock about £150 a month off payments. However, the lifetime interest cost of the loan would increase by £50,000.

In commercial markets they call this “extend and pretend”. Both the government and the opposition are encouraging banks to offer this as a solution to the current mortgage mire.

This may be one of the factors muting or at least delaying the impact of the significant rate rises seen so far. It adds to the fact that more people are on fixed rates now than during the last significant rate rise cycle in the 1990s. The Bank of England’s Monetary Policy Committee repeatedly referred to the “full impact” of the rate rise not being felt “for some time”, for this reason.

A key question is not just why British inflation is stickier than elsewhere, but whether interest rates are heading higher here than similar countries too. After a week of stuck inflation and punchy rate rises both by the Bank of England and in the mortgage markets, an inflation blame game is emerging in what might be seen as something of a monetary muddle.

If the markets are right, UK interest rates are heading for 6-6.25% at the beginning of 2024 and staying there for most of the year, levels that have not been seen since 1998. The Bank did not steer the markets away from such expectations (as they did the last time this happened last autumn). Its decisions are “data dependent”, it says.

It has been 25 years since the Bank of England became independent from government with the right to set interest rates in order to keep inflation low and stable. For a decade and a half of that period rates were at extraordinary near zero lows to support the economy after the 2008 financial crisis when bank lending almost ground to a halt.

It was always going to be a challenge to return rates to normal. The very point of independence is that the Bank of England can afford to be unpopular and take difficult but necessary decisions.

Indeed in the US, the head of the central bank, Jerome Powell, has repeatedly said that one of the points of raising interest rates, and the prime example for him of how it is working to help drain inflation, is a “correction” in the housing market. This has helped communicate his resolve to financial markets.

Bank of England governor Andrew Bailey is unlikely to be ruffled from his zen-like approach to criticism, especially the pile-on from Truss-supporting newspapers, who felt the Bank could have moved more quickly to calm markets after the mini-budget.

But there was some public criticism from some in the cabinet this week aimed at the Bank. In turn, some former Bank office holders pointed out that the government’s own policy decisions, especially on post-Brexit trade and workers, had contributed to inflationary pressures.

In public though, both the Bank and government were united on the anti-inflation mission and approach. More interestingly the chancellor, prime minister and governor all pointed to the rebuilding of profit margins by companies setting and keeping to high prices. There is some mystery and concern that falls in wholesale prices are not being passed on to customers. Supermarkets were pointed to, but there may be more of a problem further up the supply chain.

The political challenge with this approach is that it encourages supermarkets and others to be less diplomatic about the impact of government policy on prices.

On Thursday, speaking at The Times CEO summit Tesco’s boss Ken Murphy said “Brexit has definitely had an impact” – with the company facing higher costs for importing goods, higher admin costs and “significantly higher” costs for operating in Northern Ireland. Mr Murphy added that Brexit and the pandemic had affected the supply of labour “with a number of EU nationals leaving the country post Brexit”.

It is telling that officials have to ask companies to temper price increases. If the economy was functioning competitively and efficiently, this should just happen normally.

The blame game could backfire, and Number 11 is trying to avoid it. But it occurs because the political consequences of the economic pain and the mortgage market timebomb that is starting to go off, will be profound.

It is important that you do talk about financial difficulties before finding yourself in a spiral of debt. The earlier, the better.

If you think you cannot pay your debts or are finding dealing with them overwhelming, seek support straight away. You are not alone and there is help available.

A trained debt adviser can talk you through the options available.