How to Understand What’s Happening with UK Mortgage Rates

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The UK mortgage market has tightened as confidence in the economy has weakened in recent weeks. Lenders withdrew more than 1,600 home loan products after (then) Chancellor Kwasi Kwarteng’s September mini budget sent the UK economy into a tailspin.

Mortgage product rates still available have reached record highs – the average two-year and five-year fixed rates have now exceeded 6% for the first time since 2008 and 2010 respectively.

The Bank of England intervened to try to calm the situation. But that aid currently has an end date of Friday, October 14, after which it’s unclear what will happen in the financial markets that influence people’s mortgage rates.

This is a crucial question for many people: 28% of all homes are owned with a loan, with mortgage payments taking up about a sixth of household income, on average.

Looking at how the market has moved over time can help explain how we got here and where we are going – which is essentially headfirst in a time of high interest rates, low credit approvals lending and house price caps.

All financial markets are driven by information, confidence and liquidity. Investors absorb new information that fuels confidence or fuels uncertainty, and then they choose how to invest their money. As the economy falters, confidence erodes and the interest rates banks have to pay to access capital market funding – which influences mortgage rates for borrowers – become unpredictable.

Banks don’t like such uncertainty and they don’t like people not repaying their loans. Rising interest rates and uncertainty increase their risk, reduce the volume of mortgage sales and put downward pressure on their earnings.

How banks view risk

Once you understand this, it becomes much easier to predict the behavior of banks in the mortgage market. Consider the period leading up to the global financial crisis of 2008 as an example. In the early 1990s, controls on mortgages were relaxed, so by the early 2000s innovation in mortgage products was a firm trend.

This led to mortgages being offered at 125% of a property’s value, and banks loaning people four times their annual salary (or more) to buy a home and allowing self-employed borrowers to “certify themselves”. same” their income.

The risks were low at that time for two reasons. First, as the mortgage criteria became more flexible, it brought more money into the market. This extra money drove out the same supply of houses, which increased house prices. In this environment, even if people defaulted, banks could easily resell repossessed homes and so default risks were less of a concern.

Second, banks began offloading their mortgages to financial markets at this time, transferring default risk to investors. This allowed them to free up more money to lend in the form of mortgages.



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The Bank of England’s base rate also fell throughout this period, from a high of 7.5% in June 1998 to a low of 3.5% in July 2003. People wanted housing , mortgage products were plentiful and varied, and real estate prices were rising – perfect conditions for a booming housing market. Until, of course, the global financial crisis that hit in 2008.

The authorities responded to the financial crisis by tightening mortgage rules and going back to basics. This involved increasing the capital – or protection – that banks had to hold against the mortgages they had on their books and tightening the rules around mortgage products. In essence: goodbye self-certification and 125% loans, hello falling earnings multiples and bloated bank balance sheets.

The result of these changes was that fewer people could qualify to borrow to buy a house, so average UK house prices fell from over £188,000 in July 2007 to around £157,000 in January 2009. The damage was so deep they had only partially recouped some of those losses reaching £167,000 by January 2013.

Average UK house prices, January 2005-July 2022:


HM Land Registry, Registers of Scotland, Land and Property Services Northern Ireland, Office for National Statistics – UK House Price Index

New constraints

Of course, prices have exploded again more recently. This was partly because banks had slowly begun to relax, albeit with less flexibility and more regulation than before the global financial crisis. This reduction in flexibility has reduced product choice, but low interest rates and low monthly payments have encouraged individuals to take on more debt and banks to provide more mortgages.

The availability of loans is fueling property prices, so the cycle begins again, albeit this time in a more regulated market. But the result has been largely the same: average house prices have risen to just under £300,000 and the total value of UK gross mortgages has fallen from £148bn in 2009 to £316bn. pounds sterling by 2021.

But when new information hit the markets – starting with Russia’s invasion of Ukraine earlier this year – everything changed and confidence plummeted. The resulting supply-side constraints and soaring fuel prices have fueled inflation. And the Bank of England’s very predictable response was to raise interest rates.

Why? Because raising interest rates is supposed to keep people from spending and encourage them to save instead, taking the heat out of the economy. However, this rise in interest rates, and therefore in monthly mortgage payments, is occurring at a time when people’s disposable income is already being drastically reduced by rising fuel prices.

Man reading newspaper headlines about mortgages.
Recent political and economic events have squeezed many people’s budgets as mortgage rates have increased significantly.
garagestock / Shutterstock

Mortgage Market Outlook

So what about mortgage markets in the future? The current economic situation, although completely different from that of the 2008 financial crisis, is driven by the same factor: confidence. The political and economic environment – the policies of the Truss administration, Brexit, the war in Ukraine, rising fuel prices and inflation – undermined investor confidence and increased risk for banks.

In this environment, banks will continue to protect themselves by tightening their product lines while increasing mortgage rates, the size of deposits (or loan-to-value ratio) and the administrative fees they charge. Loan approvals are already down and cheap mortgages are fast disappearing.

Demand for home loans will also continue to decline as potential borrowers face a reduced product mix as well as rising loan costs and monthly payments. Few people make big financial decisions when uncertainty is so high and trust in government so low.

Optimistically, the current situation will cause UK property prices to plateau, but given the continued uncertainty stemming from government policy, it is realistic to expect declines in some areas as financial market volatility continues.

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