UK Homeowners: Navigating the Great Mortgage Crisis of 2023

Prateek Solapurker
October 16, 2023
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In the past year, UK households have confronted an unparalleled surge in their cost of living. As consumer price inflation soars to its peak in three decades, numerous individuals are feeling the financial strain. Most notably, homeowners have been stunned by the dramatic escalation in mortgage rates. This article delves into the underlying causes of the current predicament in the UK and offers guidance for homeowners during these challenging times.

The Dramatic Escalation

From late 2021, the UK experienced an astonishing increase in mortgage rates. From rates as modest as 2.29% in 2021, homeowners now face averages nearing 6% for a two-year fixed-rate mortgage. What ignited this abrupt ascent? The Bank of England’s (BoE) decision to amplify its base rate is a chief contributor. Within a mere two years, the rate skyrocketed from a modest 0.10% in early December 2021 to an astounding 5.25% by August 2023. This brisk rise has left numerous homeowners and potential buyers reeling.

The principal motive for the steep surge in interest rates was to temper the rampant inflation. Although it’s showing signs of stabilisation, inflation remains high due to factors more unique to the UK than the global landscape.

Macro-economic Triggers Behind the UK’s Pronounced Inflation

1. Post-Brexit Labour Dilemma: The abrupt halt of European immigration post-Brexit resulted in a labour deficit, subsequently causing wage inflation as businesses vied for limited workers.

2. Exodus of Immigrant Workers: The COVID-19 pandemic marked the return of many immigrant workers to their native European countries, intensifying the labour gap.

3. The Ukraine Conflict: The war in Ukraine, a major exporter of essentials like wheat and sunflower oil, alongside the Russian export ban, has induced a worldwide food crisis, amplifying inflationary pressures.

The Inflation-Interest Rate Nexus

Soaring inflation necessitated a rapid and significant uptick in interest rates, even impacting long-term rates. Rajesh Pai, CFO of Pauzible UK, highlights, “Many mortgage brokers anticipate a swift decline in mortgage rates. However, the yield curve indicates a contrary scenario. Borrowers should act with caution, even if rates decline.”

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