Home buyers face severe restrictions on the amount they can borrow, as rocketing interest rates force banks to limit mortgage offers.
In some cases customers could be able to borrow £90,000 less than previously expected.
Markets expect Bank Rate to peak at 5.9pc in June 2023 and this has been priced into the interest rate “swaps market”, which banks use to price the mortgages offered to consumers.
Chancellor Kwasi Kwarteng’s “mini-Budget” was followed by a drop in the pound to a record low and triggered fears of even higher inflation and interest rates.
Swap rates directly influence the cost of fixed-rate mortgages. A Bank Rate at nearly 6pc would push mortgage rates up to in excess of 7pc, analysts said.
But long before rates actually reach this level, the expectations of soaring rates will reduce the size of mortgages that banks are willing to lend.
Andrew Wishart, of Capital Economics, an analyst, said an expectation that the Bank Rate would rise to 6pc would cause the maximum income multiple offered by banks to plunge from 4.7 in August to 3.7 within months.
This would mean a joint-income household with a combined salary of £90,000 would see the amount they can borrow fall from £423,000 to £333,000 – a drop of £90,000, or 21pc.
Compared to the end of 2021, when the maximum loan size was five times income, the drop in their spending power will be £117,000.
Mr Wishart said: “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.”
A single-earner with a £35,000 salary would see their maximum loan size fall from £164,500 to £129,500 – £35,000 less..
Experts warned homebuyers would then have to reduce the amount of money they can offer on properties. “In our view, this reduction in buyers’ financial firepower alone will be enough to cause a drop in house prices,” Mr Wishart said.
Mortgaged buyers account for two-thirds of home sales, meaning the impact of rising rates will hit the majority of the market.
The Bank of England in August removed a requirement that lenders stress test borrowers against a rate three percentage points higher than their standard variable rate. In theory, this should have enabled them to lend to greater income multiples.
But under the remaining rules – which require banks to stress test at SVR plus one percentage point – lenders must still take account of expected rises in the Bank Rate, Mr Wishart said.
This means that even forecasts of Bank Rate rises will hit mortgage borrowing.
Borrowers face a double hit. Just as rising interest rates bring huge jumps in their monthly payments, the cost-of-living crisis is pushing up outgoings – which in turn will further reduce how many multiples of their income they can borrow.
Nothing’s ever perfect, but would it be wildly out of whack to say that as a country, we were generally better off and happier around late nineties and 2000s? Or is that unreasonable?
I wonder what was so special about those years…
> cause the maximum income multiple offered by banks to plunge from 4.7 in August to 3.7 within months.
Back in 2014 we only just managed a 3.2 multiplier and we’re told we wouldn’t be able to borrow much more than that.
No debts, no kids, no high outgoings. Just two graduates with a student loan.
I can’t imagine that many people will be given mortgage offers for just shy of 5x income.
Well as a single earner on 35k in the SE fuck me I guess.
The beginning of the house price crash I suspect. Now to figure how far it’ll fall!
[deleted]
So happy I got moved three months ago, and on a five year fixed rate. Who’s a clever bastard now then?
Well shit. Didnt realise eating avocados and halloumi fries would destroy an economy so hard. Going to drink a lot of £14 margaritas and watch one of my many streaming subscriptions in order to recover.
This is good news. Given how high interest rates are expected to go, it would be a worrying sign if banks were still willing to offer 6x mortgages.
9 comments
Home buyers face severe restrictions on the amount they can borrow, as rocketing interest rates force banks to limit mortgage offers.
In some cases customers could be able to borrow £90,000 less than previously expected.
Markets expect Bank Rate to peak at 5.9pc in June 2023 and this has been priced into the interest rate “swaps market”, which banks use to price the mortgages offered to consumers.
Chancellor Kwasi Kwarteng’s “mini-Budget” was followed by a drop in the pound to a record low and triggered fears of even higher inflation and interest rates.
Swap rates directly influence the cost of fixed-rate mortgages. A Bank Rate at nearly 6pc would push mortgage rates up to in excess of 7pc, analysts said.
But long before rates actually reach this level, the expectations of soaring rates will reduce the size of mortgages that banks are willing to lend.
Andrew Wishart, of Capital Economics, an analyst, said an expectation that the Bank Rate would rise to 6pc would cause the maximum income multiple offered by banks to plunge from 4.7 in August to 3.7 within months.
This would mean a joint-income household with a combined salary of £90,000 would see the amount they can borrow fall from £423,000 to £333,000 – a drop of £90,000, or 21pc.
Compared to the end of 2021, when the maximum loan size was five times income, the drop in their spending power will be £117,000.
Mr Wishart said: “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.”
A single-earner with a £35,000 salary would see their maximum loan size fall from £164,500 to £129,500 – £35,000 less..
Experts warned homebuyers would then have to reduce the amount of money they can offer on properties. “In our view, this reduction in buyers’ financial firepower alone will be enough to cause a drop in house prices,” Mr Wishart said.
Mortgaged buyers account for two-thirds of home sales, meaning the impact of rising rates will hit the majority of the market.
The Bank of England in August removed a requirement that lenders stress test borrowers against a rate three percentage points higher than their standard variable rate. In theory, this should have enabled them to lend to greater income multiples.
But under the remaining rules – which require banks to stress test at SVR plus one percentage point – lenders must still take account of expected rises in the Bank Rate, Mr Wishart said.
This means that even forecasts of Bank Rate rises will hit mortgage borrowing.
Borrowers face a double hit. Just as rising interest rates bring huge jumps in their monthly payments, the cost-of-living crisis is pushing up outgoings – which in turn will further reduce how many multiples of their income they can borrow.
Nothing’s ever perfect, but would it be wildly out of whack to say that as a country, we were generally better off and happier around late nineties and 2000s? Or is that unreasonable?
I wonder what was so special about those years…
> cause the maximum income multiple offered by banks to plunge from 4.7 in August to 3.7 within months.
Back in 2014 we only just managed a 3.2 multiplier and we’re told we wouldn’t be able to borrow much more than that.
No debts, no kids, no high outgoings. Just two graduates with a student loan.
I can’t imagine that many people will be given mortgage offers for just shy of 5x income.
Well as a single earner on 35k in the SE fuck me I guess.
The beginning of the house price crash I suspect. Now to figure how far it’ll fall!
[deleted]
So happy I got moved three months ago, and on a five year fixed rate. Who’s a clever bastard now then?
Well shit. Didnt realise eating avocados and halloumi fries would destroy an economy so hard. Going to drink a lot of £14 margaritas and watch one of my many streaming subscriptions in order to recover.
This is good news. Given how high interest rates are expected to go, it would be a worrying sign if banks were still willing to offer 6x mortgages.