The impending mortgage crisis explained in simple terms

Millions of homeowners face a significant increase in their monthly mortgage payments as the Bank of England raises interest rates (PA)

Millions of UK homeowners are facing a steep rise in their mortgage payments as the Bank of England (BoE) prepares to raise interest rates in a bid to curb spiraling inflation and stem economic turbulence.

Experts have sounded the alarm over a housing market crash, fearing unaffordable payments could trigger a sell-off.

The looming UK mortgage crisis explained in nine points

Why are mortgages getting more expensive? The BoE is expected to aggressively raise interest rates in November in a bid to control runaway inflation and calm the market chaos that followed Chancellor Kwasi Kwarteng’s mini budget.

Interest rates are set to rise sharply as the BoE attempts to control inflation (Yahoo News UK/Flourish)

Interest rates are set to rise sharply as the BoE attempts to control inflation (Yahoo News UK/Flourish)

How high will interest rates go? The base rate could rise to 6% in the first half of next year. Forecasts have soared since Kwarteng revealed the government’s plan to cut taxes, causing the pound to collapse and the price of government bonds to soar.

The impact is already being felt. Lenders have suspended mortgage products en masse as they scramble to reprice them amid uncertainty about where rates will move. Over 40% of available mortgages were taken out within a week of the mini budget.

Mortgage rates are on the rise in the UK (Yahoo News UK/Flourish)

Mortgage rates are on the rise in the UK (Yahoo News UK/Flourish)

The rates available for new offers are skyrocketing. According to Moneyfacts, the average rate for a two-year fixed-rate mortgage reached 5.17% on Friday, compared to 2.57% in March 2021. The average rate for a five-year fixed-rate mortgage was 5.1% compared to 2.75% in March 2021. .

Millions of homeowners will see their mortgage payments soar over the next two years (Yahoo News UK/Flourish)

Millions of homeowners will see their mortgage payments soar over the next two years (Yahoo News UK/Flourish)

How many people will be affected? Some 600,000 people are currently on fixed rate deals ending this year, with a further 1.8 million people on fixed rate deals ending sometime next year. This means that millions of people will likely have to remortgage at a significantly higher rate than they currently do by the end of 2023.

Mortgage rates set to soar as Bank of England raises interest rates (Yahoo News UK/Datawrapper)

Mortgage rates set to soar as Bank of England raises interest rates (Yahoo News UK/Datawrapper)

Some borrowers will see their monthly payments reach unaffordable levels. A person with a mortgage of £100,000 over 25 years at a rate of 2% would pay £424 a month. If the rate rose to 6%, they would have to pay £644 a month.

What does this mean for property prices? Mortgage rates are rising at a time of skyrocketing inflation, and many homeowners won’t be able to afford their new monthly rates. This could force a large number of people to sell their homes, leading to lower prices.

It’s unclear how much the prices might drop. Some analysts think they could fall as much as 20%. The BoE is bracing for a worst-case scenario with prices falling by a third. Prices stagnated in September without growth for the first time in over a year.

How serious is it? Housing market analyst Neal Hudson called the outlook “terrifying”. He said: “The events of the past week have accelerated the market towards what was its worst-case scenario and the opportunities to avoid it are narrowing.”