After UK bank bosses raised concerns about the state of the UK’s housing market at a high level meeting at No. 11 Downing Street, the chancellor is now considering whether to extend the government’s Mortgage Guarantee Scheme.
The Thursday meeting was held amid growing concerns about the possible fallout from rapidly rising mortgage interest rates.
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After the mini-budget by the government sent UK financial markets into meltdown, executives from Barclays and Nationwide were asked to discuss a range of options for consumers who are struggling to get mortgages.
Kwasi Kwarteng is believed to be considering the extension of the mortgage guarantee program beyond December’s deadline.
Banks and building societies can purchase a government guarantee on the portion of the mortgage that is between 80% to 95% of the property’s value. This means that the government will pay the lender’s loss if the borrower is in financial trouble and their property is taken away.
The program was revived during the pandemic to ensure that 95% of mortgages were still available to borrowers. This was in response to fears that house prices could crash.
The pandemic pushed house prices higher. An April 2021 analysis showed that single buyers aged 30 and below in the UK would not be able to purchase a home in half of the local authority areas in England or Wales, despite what the scheme claimed would be done.
The mortgage guarantee scheme doesn’t directly address the problem of rising rates on fixed home loan deals. It is the money market swap rates that determine their pricing. However, the policy will give reassurance to lenders in a time when many forecasters predict a drop of 10% or more in house prices. This will help the government to ensure that low-deposit mortgages are priced fairly, which may allow lenders to avoid imposing a large premium due to uncertain economic conditions.
Lenders are compensated for any losses incurred by the guarantee in the event that the property is repossessed.
After a difficult week, the average fixed rate for a two-year mortgage rose more than 6% for the first year since 2008.
After the mini-budget, interest rates on mortgages have risen. This pushed the pound to new lows and caused the UK’s government bonds to plummet, raising concerns about the country’s economic future.
The UK banks had to make it harder for them to price mortgages properly after the meltdown, which ultimately led to higher long-term interest rates and increased expectations. This led to a massive withdrawal of home loans last Wednesday, with almost 40% of mortgage deals being canceled at the same time as banks began returning with new products priced between 1-2% and 22% higher.
Since then, supervisors from the Financial Conduct Authority (FCA), have been asking banks how they intend to assist mortgage borrowers.
According to data firm Moneyfacts, the average two-year fixed rate rose to 6.11% on Thursday. It was 4.74% the day before the mini-budget. This is compared to 5.75% on Monday and 6.07% on Wednesday. The average five-year fixed mortgage rate rose to 6.02% on Thursday.
One executive described the meeting to be “productive and supportive”, but bankers were believed to have stressed the fact that recent volatility in the markets had affected the mortgage market.
Kier Starmer, Labour’s leader, took aim at Thursday’s government’s effect on the mortgage market. During a visit to Bilston and Wolverhampton, he stated that “the prime minister has taken over the economy, driven them into a wall, [and] pretending this is pro-growth.” It is anti-growth if you have consequences that raise mortgage payments by hundreds upon hundreds of pounds each month. It is a destroyer of growth. It is certainly not pro-growth.
The meeting on Thursday was attended by UK bank executives who are believed to have voiced concerns about the FCA’s new consumer duty regulations. Although the rules are intended to place consumer interests at heart of financial services’ decision-making, the bosses claimed that it could prevent banks from offering products that could benefit customers over the long term.
Some bank bosses raised concerns about ringfencing regulation, which separates investment banking operations from regular savings and current accounts. However, executives from smaller banks talked about how to lower the loss-absorbing capital that they must raise and protect against risky assets.
Thursday’s meeting was similar to the one with investment bankers and asset managers last week. They were asked about their ideas for stimulating growth and investment from the City, and what the government could do to calm the markets.
Kwarteng, Liz Truss tried to emphasize their pro-business, Pro-City stance. They have scrapped the EU banker bonus cap, and are planning to unveil “an ambitious package regulatory reforms” by October’s end.