UK mortgage pain rises as squeeze intensifies
Figures from the Bank of England on Wednesday showed the typical rate on a new two-year, 75 per cent loan-to-value fixed mortgage rose 37 basis points in June to 6.63 per cent.
This was the highest rate since February 2000 and explains why mortgage approvals have tumbled in recent months. Approvals for new mortgages have fallen by half in a year while house prices have dropped around 8 per cent in as many months.
The tighter credit conditions will not be lost on Bank of England policymakers who began a two-day meeting on Wednesday to decide interest rates.
Since the start of December, the central bank has cut official interest rates by 75 basis points to 5.0 per cent. But rates on new fixed-rate mortgages have jumped by more than 50 basis points as lenders have moved to restore their margins and rebuild battered balance sheets.
At the height of Britain's housing boom, lenders were scrambling over themselves to lend money. Since the credit crunch hit last summer, their own funding costs have leapt and their willingness to lend has evaporated.
"The credit channel seems to be drying up," said Peter Newland at Lehman Brothers.
The Bank looks almost certain to keep rates steady this week but Newland said he expected a cut before the end of the year.
REPAYMENT SHOCK
A continued surge in mortgage rates is bad news not just for new home buyers but also the millions of Britons coming to the end of fixed-rate deals.
"The repayment shock for those attempting to refinance two-year fixed mortgages is now huge. They are paying on average 163 basis points more than when they took the mortgage out," said George Buckley, chief UK economist at Deutsche Bank.
At a time when food and utility bills are rising, the extra cost will not go unnoticed. A survey from the Nationwide building society showed British consumer confidence fell for a sixth month in June to its lowest since the series began in May 2004.
There was also fresh gloom from the housebuilder sector.
British housebuilder Redrow said it was cutting 40 per cent of its workforce and was set to reduce the value of its landing holdings significantly.
The chief executive of Bovis Homes, meanwhile, said the housing market downturn had gathered pace in the past few weeks and now felt "an awful lot worse" than in the last recession in the early 1990s.
Britons hoping to reduce the hit by taking out a longer-term fixed rate mortgage will also be disappointed. The rate on a 10-year mortgage for someone with a 25 per cent deposit rose by 27 basis points in June to 6.45 per cent, the highest since January 2001.
Homebuyers unable to put down such a deposit are finding themselves almost locked out of the market. For a second month running, the Bank did not offer figures for two-year mortgage rates based on a 5 per cent deposit on the basis that there were no longer enough lenders offering them.