An emergency rate rise would "shock many borrowers" and could "bring the market to a grinding halt"
Market analysts predict that interest rates will continue to rise until the halfway point of next year, dealing a huge blow to mortgage customers who are trying to get a foot into the property ladder.
The Bank of England (BoE) base rate is projected by experts to peak at around 5.90% in June 2023, which would not only increase the amount that mortgage-backed homebuyers pay, it would also reduce the amount that they could borrow.
A report by The Telegraph quoted an economist as saying that a base rate rise to nearly 6.0% would cause the maximum income multiple offered by banks to fall from 4.7 in August 2022 to 3.7 within months.
As a result, a joint-income household with a combined salary of £90,000 would see the amount they can borrow drop from £423,000 to £333,000 – £90,000 ,or 21%, less. Meanwhile, a single-earner with an income of £35,000 would see their maximum loan size decrease from £164,500 to £129,500 – a cut of £35,000.
“Affordability stress tests should already be preventing buyers from borrowing more than four times income, and as interest rates rise it will become more restrictive,” Andrew Wishart, senior property economist at Capital Economics, said.
By comparison, the maximum loan size for mortgage borrowers was five times their income in December 2021. Since then, however, the central bank has increased the base rate multiple times from the pandemic low 0.10%. The latest rate change was decided last week, which pushed the rate up by 0.50% to the current 2.25% – a figure that may change again sooner than expected.
Last week’s mini budget of Chancellor Kwasi Kwarteng sent the pound plunging to its all-time low of $1.035 against the US dollar earlier this week. As a response to the weakening pound, the central bank said that it would not hesitate to change interest rates, potentially in an emergency meeting before the next scheduled one in November.
Read more: Very few offerings under 5% by next week - broker.
An emergency rate rise, experts said, would “shock many borrowers” and could “bring the purchase market to a grinding halt.”
“Most are expecting the next increase at the scheduled November meeting, but it may come sooner than that, potentially this week,” Michael Webb, managing director at Mortgage Republic, said. “If an emergency rise does occur this week, it will be an enormous shock for many borrowers and could hit property market sentiment hard.”
“If rates were to rise again after an emergency meeting, it would lead to an even greater rush of activity in the mortgage market,” Manooch Suree, director at mortgage broker Zinga Financial Servces, commented. “It may also bring the purchase market to a grinding halt due to fears of what could happen next.
“We are in a highly fluid mortgage market now, with conditions changing by the day. People like certainty and there’s not much of that right now.”
