The UK Faces a Mortgage Crisis

The UK is currently facing a financial crisis as rising mortgage loans threaten to undermine the household budgets of millions of people in the country.

The UK is currently facing a financial crisis as rising mortgage loans threaten to undermine the household budgets of millions of people in the country. The Bank of England (BoE) recently raised interest rates by 50 basis points to 5% at its June 22 policy meeting, which is the highest interest rate in 15 years in the UK, with the aim of quelling inflation without sending the country into recession. However, inflation is decelerating slowly, and markets believe that the only way to contain prices is for the BoE to push interest rates to highs not seen in more than two decades.

The dream of a "soft landing" seems increasingly distant, as the monetary squeeze is eroding people's incomes, taking away money that could have been spent in shops, bars, and restaurants. The UK economy is forecast to grow by only 0.2% this year, a significant drop compared to previous years. With the housing market at the center of the economic pain, shares of UK home builders are down nearly 20% from their recent peak in early May and are at their lowest point this year.

The effect on the mortgage market from the BoE's interest rate tightening dynamics is huge. Since March last year, the average two-year fixed mortgage interest rate has more than tripled to 6%. At current rates, the average home mortgage payment cost will increase by £280 a month compared to March 2022, which is more than twice the cost of extra energy bills after the Russian-Ukrainian conflict broke out. Rising mortgage interest payments will cost 1.4 million UK households 20% of their disposable income, according to estimates by the IFS-based Institute for Fiscal Studies (IFS) London. Over the next 18 months, 2.4 million UK households will face further financial stress as their fixed-rate mortgages expire and move to floating rates, according to UK Finance, a banking and financial association in the United States.

The big risk is that if consumption plummets, this will lead to a wave of layoffs in businesses and trigger a worse economic crisis. Dan Hanson, senior economist at Bloomberg Economics, said that if the BoE raised interest rates to 6%, the UK GDP could fall by 2%. The BOE is reluctant to address this scenario, but a recession may be needed to help lift Britain out of the specter of inflation. According to Hanson, continuing to raise interest rates to control inflation, even at economic costs, is the only path for the BoE.

Politically, the slow cooling of inflation is putting pressure on the Prime Minister Rishi Sunak, as he has pledged to halve inflation growth to 5% by the end of the year. The UK labor market remains strong, and demand is stable, as evidenced by better-than-expected consumer confidence and better-than-expected retail sales. But there were some less positive data, including UK manufacturing activity that fell in June and service sector activity, the largest part of the economy, growing more slowly than expected.

Many UK consumers are shopping for discounted items at supermarkets, and retail sales figures show sales falling as prices rise. Real incomes in the UK have fallen over the past two years, and households have cut back on spending. This trend is expected to continue as mortgage interest rates keep on rising.

The UK is currently facing a financial crisis due to rising mortgage loans. The BoE has raised interest rates to contain inflation, but prices continue to rise, and more aggressive measures may be necessary. With consumption plummeting, there is a risk of layoffs in businesses and deteriorating economic stability. As such, many citizens are struggling to make ends meet as mortgage payments take up a significant portion of their disposable income. The government must take the issue seriously and come up with a plan to help those who are struggling to make ends meet.