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Lending halt, double mortgage costs – the situation on the British housing market is escalating

The turbulence surrounding the British pound is affecting the real estate financing market.

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Lending halt, double mortgage costs – the situation on the British housing market is escalating

The turbulence surrounding the British pound is affecting the real estate financing market. Since Monday, a number of banks, building societies and mortgage lenders have suspended the granting of new loans until further notice.

“Due to changes in the financial markets, we currently have no new interest rates available for new or existing customers. We will be bringing new mortgage rates back to market as soon as possible,” the Bank of Ireland said. With Halifax, the Skipton Building Society and Virgin Money, some of the largest mortgage lenders have left the market for the time being.

The temporary shutdown shows how quickly the turbulence on the currency market in Great Britain has an impact on the real economy. The banks are letting the mortgage business rest because the further development of interest rates is uncertain.

However, a clear jump is considered agreed. Index swaps show that market participants are currently expecting an interest rate of 5.8 percent for the first half of 2023. Interest rates are currently 2.25 percent; at the beginning of the year, a top rate of 1.5 percent was still being discussed.

A look at government bonds also makes it clear how significantly the interest rate level has shifted in the past few days. The 10-year gilt yield rose 1.26 percentage points to 4.1% in September - the sharpest jump since the 1970s.

Gilts with a maturity of five years outperform the corresponding papers from Italy and Greece in terms of yields, which means that financing is correspondingly more expensive for the British government than for southern Europeans.

But the higher interest rate level is not only important for state financing. Most real estate savers will also feel it directly. "If mortgage rates rise to 6 per cent, as current market expectations for the discount rate suggest, monthly payments for the financing cost of a two-year fixed rate mortgage will jump to £1490, up from £863," explained Samuel Tombs, UK economist Pantheon Macroeconomics.

"Many will simply not be able to afford it." Because even without the rise in interest rates, the cost of living has risen significantly for months, mainly due to rising energy and food prices. In August, the price increase was 9.9 percent. Homeowners therefore have to make additional restrictions. In the worst case, foreclosures threaten.

For many households, the higher repayment costs of a property are an immediate problem, since a significant proportion of mortgage loans on the island - unlike in Germany - have variable interest rates. A change in the interest rate would have a direct impact on around 2.2 million households.

The rest of the market is dominated by real estate loans with fixed-interest terms of between two and five years. According to Neil Hudson, founder of real estate analysis firm Residential Analysts, around 350,000 of these contracts expire in the fourth quarter alone. An interest rate of less than two percent has so far applied to significantly more than half of them.

The pound stabilized on Tuesday. It was trading at around $1.08 after briefly falling as low as $1.03 on Monday. A level that sterling had last seen in the mid-1980s.

But analysts warn that the turbulence may not be over yet. The trigger was the new government's announcement on Friday that it would relieve households and companies with a guaranteed upper limit on energy costs and also significantly reduce the tax burden.

Finance Minister Kwasi Kwarteng expects this to boost growth. But the package will be funded entirely through government debt, with £70 billion worth of bonds in the current year alone. Observers not only warn of the lack of fiscal discipline, they also point to the threatening inflationary tendencies of the measures.

Jordan Rochester, currency strategist at Nomura, identifies a fundamental balance of payments crisis. Politicians would hope that the situation would calm down again, "but hope is not a strategy."

He expects the pound to reach parity with the dollar by the end of November, after which it will depreciate further. Former US Treasury Secretary and economist Lawrence Summers also sees the pound as soon as the US dollar in view of the country's trade deficit.

Kwarteng had already announced further tax cuts at the weekend. “The first step to regaining credibility is to say nothing unbelievable. I was surprised when the new Chancellor of the Exchequer spoke of the need for more tax cuts over the weekend," Summers said early Tuesday morning, criticizing British policy as "extremely irresponsible".

"Everything on shares" is the daily stock exchange shot from the WELT business editorial team. Every morning from 7 a.m. with the financial journalists from WELT. For stock market experts and beginners. Subscribe to the podcast on Spotify, Apple Podcast, Amazon Music and Deezer. Or directly via RSS feed.

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