U.K. Market Turmoil Ripples Into Home Loans

LONDON – Some British banks halted new mortgage lending on Tuesday, in the latest fallout from market turmoil fueled by the new government’s plans for sweeping tax cuts and energy subsidies.

At least six mortgage lenders have stopped making some loans, or have briefly stopped lending to homebuyers altogether, according to UK Finance, an industry trade group.

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PLC – Europe’s largest bank by market value – stopped making new home loans at midday. HSBC said it would resume making them on Wednesday, citing capacity limitations as competitors withdraw.

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And the UK’s largest mortgage lender by market share, said it had reduced the scope of its mortgages. Virgin Money UK VMUK 0.26%

The PLC said it has temporarily withdrawn from the market but hopes to return later this week.

Banks and industry analysts pointed to a sharp sell-off in British government bonds, which began on Friday, amid uncertainty over the extent and speed of the Bank of England’s rate hike. This turmoil makes it difficult for lenders to be confident in the pricing of mortgages.

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UK 10-year government bond yields jumped above 4.5% on Tuesday afternoon in London, up more than one percentage point from the previous week. ICE BofA index data shows that UK bonds are causing record losses for investors.

“Recent volatility in the financial markets can make it difficult for companies to set rates for fixed rate deals, but the market remains competitive, with a wide range of mortgages available,” said Charles Rowe, UK mortgage manager.

Mr. Rowe said more than 100 lenders have continued to offer mortgages and that most homebuyers likely won’t be affected by Tuesday’s moves.

However, analysts said the moves are an early sign of an ugly period ahead for the UK housing market and economy. Analysts and policy makers believe the UK is heading into a recession.

“Recent volatility in the financial markets can make it difficult for companies to set prices for fixed-rate deals.”

– Charles Rowe, UK Mortgage Manager

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New Prime Minister Liz Truss’ government on Friday unveiled deep tax cuts and a spending package aimed at revitalizing Britain’s economy. The mini budget triggered a sell-off in the pound and government bonds, reflecting investor fears it would fuel faster inflation, force the Bank of England to raise interest rates more aggressively, and require a significant increase in debt issuance.

How did China, Mexico, and Greece deal with inflation, and where is the US? WSJ’s Dion Rabouin explains.

Market pricing suggests that investors have quickly shifted to expecting higher reference rates from the BoE – which has a huge impact on banks’ borrowing costs, and thus mortgage rates. Investors now expect the central bank rate to peak above 6% in mid-2023, with that forecast peak rising about 1.5 percentage points since last Wednesday.

Consulting firm Pantheon Economics said in a note to clients Tuesday that the benchmark interest rate of 6 percent will lead to a wave of defaults on mortgages next year.

Unlike the US, where a fixed-rate 30-year mortgage predominates, most households in the UK only pay a fixed annual rate of interest for two or five years, after which their loans are reset to pay a floating rate linked to standard borrowing costs.

Many families will have to refinance at higher rates next year after fixed two-year periods expire, Pantheon said, and could see their monthly payments rise on average by 73% to 1,490 pounds, equivalent to about $1,593.

The mortgage turmoil highlights how investor skepticism threatens to undermine Ms Truss’ plans. For example, the tax cut for first-time home buyers is designed to stimulate home sales. But higher monthly mortgage payments, due to higher interest rates, will weaken the housing market.

“You have the Bank of England and the government going in different directions,” said David Muir, analyst at Moody’s Analytics.

Write to Josh Mitchell at [email protected]

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