UK Mortgage Pain Is Only Getting Started as Fixed Deals End
Comment of the Day

April 12 2023

Commentary by Eoin Treacy

UK Mortgage Pain Is Only Getting Started as Fixed Deals End

This article from Bloomberg may be of interest to subscribers. Here is a section: 

To be sure, homeowners remortgaging on a fixed-rate deal are likely to benefit from a lower loan-to-value ratio than when they first secured a mortgage. That’s because UK house prices have grown by more than 11% since March 2021, according to Nationwide Building Society, and households have paid off a chunk of capital over the last two years.

Crucially, high-LTV lending makes up only a small fraction of UK mortgages, with 90% or higher LTV deals accounting for about 5% of all new home loans in the last quarter of 2022, BOE data shows. And even those borrowers who took out a 90% LTV in September 2021 are likely to see higher costs cushioned by stronger wage growth, according to Iwona Hovenko, an analyst covering European real estate for Bloomberg Intelligence.

“Homeowners who took mortgages at 90% LTV in 2021 could now see it drop to 75%,” she said. What’s more, “the extra post-tax pay after just two years could more-or-less offset the cash increase in monthly mortgage repayments.”

Eoin Treacy's view

When inflation is running at 10% and wages are growing at 6.5% the cost of everything is rising quicker than wages. The jump in mortgage rates, as fixes roll off, represents a significant hit to household finances which will curtail the ability to spend on other items. That’s the primary reason the Bank of England has not been more aggressive in raising rates.

Nevertheless, the BoE is likely to be raising rates longer than the Fed which is supporting the Pound. Cable continues to test the $1.25 area and a breakout looks more likely than not.

European markets were among the biggest beneficiaries of Dollar weakness between 2003 and 2008. In Dollar terms, the FTSE-100 and Europe STOXX 600 both exceeded their 2000 peaks during that period even if that feat was not achieved in nominal terms.

The clear message is when global growth eventually picks up, no US markets will be among the biggest beneficiaries in constant currency terms. 

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