Brits Brace for Higher Mortgage Payments Despite Bank of England Rate Cut
AInvestWednesday, Nov 6, 2024 7:47 am ET
2min read
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Despite the Bank of England's expected rate cut, Britons face higher mortgage payments due to recent fiscal policy changes and housing market dynamics. The government's £40 billion tax hikes and debt rule changes have led to increased borrowing costs, with 10-year gilt yields rising to 4.508% (CNBc, 2024). This has prompted lenders to raise mortgage rates, with Virgin Money increasing them by 0.15% and some banks diverging by reducing rates (CNBc, 2024). The average five-year fixed mortgage rate is now 4.64%, down from 5.36% last year, but still higher than pre-budget levels. This fiscal reset comes as the BOE considers a more dovish stance, but markets now price in a slower pace of rate cuts, with a 97% chance of a 25 basis point cut on Nov. 7 (CNBc, 2024).


Lenders' funding costs and market expectations play a significant role in determining mortgage rates, even as the Bank of England cuts interest rates. Despite the BOE's rate cut, mortgage rates have risen due to increased funding costs for lenders. Virgin Money and Halifax have raised or maintained rates, while Santander reduced rates, indicating divergent outlooks. Market expectations, influenced by the government's tax-and-spend budget, suggest that interest rates may stay higher for longer, impacting mortgage rates. Lenders' funding costs, driven by gilt yields and market uncertainty, have contributed to the rise in mortgage rates.


The housing market is closely linked to consumer spending and mortgage rates, with supply and demand dynamics playing a significant role. When house prices rise, homeowners feel wealthier, boosting spending and confidence. Conversely, falling prices can lead to reduced spending and investment. Mortgages, the largest source of household debt, can put the banking system at risk during economic downturns. Housing investment contributes to GDP through new builds, while buying and selling existing homes indirectly benefits the economy through transaction costs. However, the Bank of England's role in setting interest rates influences mortgage affordability. Lower rates reduce borrowing costs, making mortgages more affordable, while higher rates increase costs. Despite rate cuts, housing market dynamics, such as supply and demand, can offset the impact on mortgage affordability.

Higher mortgage payments could lead to reduced consumer spending, as households allocate more income to debt servicing. This could slow economic growth, as consumption accounts for around 60% of UK GDP. Moreover, lower-income households may face financial distress, potentially leading to increased problem debt and reduced investment in human capital. The Bank of England estimates that around 1.2 million low-income mortgage holders already went without essentials in the six months to May. Long-term, this could exacerbate wealth inequalities and hinder economic recovery.

In conclusion, Britons face higher mortgage payments despite the Bank of England's expected rate cut due to recent fiscal policy changes and housing market dynamics. Lenders' funding costs and market expectations play a significant role in determining mortgage rates, even as the BOE cuts interest rates. The housing market's influence on consumer spending and mortgage affordability underscores the importance of understanding these dynamics in policy-making and investment strategies. As higher mortgage payments could lead to reduced consumer spending and financial distress for lower-income households, policymakers should consider these trends when formulating housing and monetary policies to mitigate long-term affordability challenges.
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