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The mortgage crunch: Why is it happening, will it get worse and what can you do if you’re struggling?

todayAugust 12, 2023 2

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The mortgage crunch: Why is it happening, will it get worse and what can you do if you’re struggling?

Britain is facing a deepening “mortgage crunch”, with households already wrestling with the cost of living crisis facing yet a further squeeze on their budgets.

It has been warned that those renewing their property loans next year will end up paying out on average an extra £2,900 annually.

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But what is driving soaring costs, will it get worse before it gets better – and what can you do if you are struggling?

Sky News looks to answer your questions.

Why have mortgage rates been increasing?

The government and the Bank of England (BoE) are under pressure to tackle prolonged high inflation, which has led to hikes in everyday prices, most notably for food.

The main tool available to the Bank to control this is interest rates.

Raising it makes it more expensive for people to borrow money and encourages them to save, meaning overall they spend less, helping to cool prices and lower inflation.

But it means loans, such as mortgages, become more expensive to take out.

Laith Khalaf, head of investment analysis at AJ Bell, summed it up when he pointed out the BoE is “caught between a rock and a hard place, as it has to choose between pushing more mortgage borrowers towards the brink and letting inflation run riot”.

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‘No alternative’ to interest rate rise

The current bank rate stands at 4.5% after climbing 12 times in a row.

Some variable rate mortgages directly track this and automatically increase in line with it.

Borrowers can also end up on a standard variable rate when their initial mortgage deal ends. While set by lenders, it often follows movements in the base rate.

Most homeowners tend to take out fixed-rate deals, the pricing of which have also been rising given expectations around inflation, which eased back far less than expected in April, hitting 8.7%.

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Read more:
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Is there more pain to come?

Given many people are on fixed rates, they are yet to feel the impact of recent mortgage rate hikes.

But around 1.3 million households are expected to reach the end of their fixed-rate term from April to the end of the year, the BoE said last month.

Analysts point out the majority of these were set at interest rates below 2%.

Ahead of a BoE base rate decision next week, with experts predicting a 13th increase to 4.75%, fixed mortgages have already been on an upward march, with some major lenders temporarily pausing applications and increasing their rates.

The average two-year deal reached 6.01% on Monday, according to financial information company Moneyfacts.

The Resolution Foundation think-tank expects the average two-year fixed-rate mortgage will not fall below 4.5% until the end of 2027.

The average mortgage holder is looking at a £200 increase in their monthly repayments if their rate goes up by three percentage points.

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Why doesn’t the government step in to help mortgage-holders?

Protecting people with home loans from the sting of rising interest levels would be “risky territory”, a former BoE deputy governor has warned.

Sir Charlie Bean told Sky News intervention by Whitehall could actually lead to rates being hiked even more.

Speaking to the Sophy Ridge On Sunday show, Sir Charlie said: “There’s not a lot (the government) can do to influence the overall macro environment in a favourable way.

“There may be things it wants to do to alleviate pain on particular parts of the population, poor households or whatever.

“There obviously have been some calls for protecting those with mortgages.

“I think that’s risky territory to get into because of course if you do that and reduce the pressures on those with mortgages, that reduces the extent to which the economy slows and just means the Bank has to raise interest rates even more.”

What help is available if I am struggling with my payments?

The advice is to speak to your lender as early as possible.

They may be able to suggest various options to keep monthly payments more manageable, although some, such as extending the mortgage term, may mean paying more over the longer term, so any decision needs to be weighed up carefully.

If you are coming to the end of a mortgage, a broker could help with finding a deal that is right for you.

Sam Richardson, deputy editor of Which? Money, said: “Mortgage lenders are obliged to offer support to their customers, so those struggling to meet mortgage payments should speak to their lender about what help is available.

“Doing so will not affect your credit rating. Further support may come in the form of temporary break from payments, interest-only repayments or extending the term of the mortgage.

“If you’re entitled to benefits such as universal credit, you may be able to apply for the government’s support for mortgage interest loan scheme.”

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