Deepening mortgage turmoil spells trouble for Rishi Sunak

Rates are surging again as inflationary pressures continue to exert themselves and the City bets on a swift response from the Bank of England, writes James Moore

Around one in five first-time buyers are taking out ‘deals’ lasting more than 35 years (PA)

Is the ghost of Liz Truss rattling her chains and spooking the mortgage market? It probably feels like that for borrowers.

The price of both two- and five-year fixed loans has leapt in recent days, while the number of deals on offer has tumbled as lenders withdraw their products.

The latest data from Moneyfacts indicates 4,686 deals on the market compared to a high of 5,385 on 22 May, just a couple of weeks ago.

It shows how quickly prices have risen; the average rate for a two-year fixed mortgage is now 5.72 per cent – the highest since last December when the Liz Truss premium was still much in evidence. Only this time last week, it was 5.34 per cent.

Five-year deals are generally cheaper (reflecting an expectation that rates will fall further out) with the average coming in at 5.41 per cent but that too is sharply higher than the 5.01 per cent available a week ago.

To put things in perspective, the peaks in the wake of the Truss/Kwarteng mini-Budget were 6.47 and 6.32 per cent. Borrowers who took the plunge then must be feeling sorely vexed.

The catalyst for all of this is the very real fear that base rates will peak at a much higher level than had previously been expected as a result of Britain’s stubbornly high inflation.

A rash of recent data has played into that; the latest is the snapshot of Britain’s dominant services sector, courtesy of the Purchasing Managers Index (PMI) released by S&P Global. It came in at 55.2, which was down a bit on April (55.9) but still represents robust growth. This is the fourth consecutive month above 50, which indicates growth, but there was a sting in the tail of the release which warned of “a rapid increase in average cost burdens across the service economy”.

While S&P Global found that resistance among clients may be starting to act as a brake on providers raising prices, and the rate of inflation did ease to its second lowest since August 2021, prices nevertheless continue to rise at an uncomfortable rate.

Saudi Arabia also threw some petrol on the fire by announcing a unilateral production cut in an attempt to juice the oil price. The response was a 2.5 per cent increase in Brent Crude – not much, but the City took note. The yield (interest rate) on two-year government bonds rose, which means more bad news for those looking for a two-year fix. It is the price of those bonds, and the expectations for future rates, which governs the price of those deals.

Affordability is strained in the current situation, which helps to explain why the housing market has been wobbling together with the sharp rise in the popularity of 35-year mortgage deals, even though such products may mean borrowers still paying into their retirements. A 35-year term makes the overall cost of buying a home much more expensive than the traditional 25-year home loan, but it makes the monthly cost lower.

This is a trend that seems set to continue, as the squeeze on household incomes shows scant sign of easing. Things are particularly hard on those coming off previous fixed-rate deals. They are finding themselves having to potentially pay hundreds of pounds a month more than they had become accustomed to at a time of booming household bills.

Rachel Springall, Moneyfacts finance expert, has urged borrowers to seek advice and speak to a broker, which is eminently sensible. Never has shopping around been more important. But most people will still end up looking at the least worst option rather than a good one.

What ought to worry someone like Rishi Sunak is this: will voters blame the current administration for this? One reason for the Conservative Party encouraging home ownership is that owners are more likely to vote Tory while renters tend to favour Labour.

Current turmoil in the mortgage market, hot on the heels of the Truss/Kwarteng mini-Budget disaster, could ultimately tip the balance as the Bank of England continues to fight to contain inflation.