Stand by for impact. The UK is set for a severe mortgage-related squeeze of its own – and the reverberations could be very widely felt.
After five rate hikes by the Bank of England, floating rate loans holders are already suffering. But the bulk of UK homeowners are sitting on a short-term fixed rate mortgage, say S&P in a new report, which will reset to a significantly higher rate over the next 12 to 18 months.
A number of factors mean that the likely scale of this wave of resets is “relatively severe by recent standards” says the rating agency. The rapid tightening by the Bank, which started raising rates in August 2006, means that the jump in payments will the larger for borrowers coming off fixed rates, while slowing house prices and tightening lending standards mean fewer options for refinancing.
Increases in the uptake of fixed-rate loans will mean the effect will be more widespread that in the past. 63 per cent of new loans were fixed rate in 2005 and 2006 compared with just 38 per cent two years before. In the nonconforming segment (British for subprime in this context), almost 70 per cent of loans backing 2006 vintage securitisations were fixed rate, says S&P.
Overall more than a fifth, 23 per cent or £9bn worth, of nonconforming loans backing residential MBS are fixed-rate and due to reset before the end of 2008, estimate S&P. That’s around 80,000 households, with a large chunk set to fall in the first half of next year.
And average monthly repayments could rise by more than a quarter, meaning delinquencies are likely to continue increasing.
Assuming current market conditions persist, we think that even borrowers who are able to refinance will suffer an average increase of 26% in their monthly payments. For those unable to refinance, the shock could be significantly more severe.
In the agency’s most severe scenario, increases in monthly repayments are as high as 60 per cent.
But could the wider impact be felt even ahead of the wave of mortgage resets due next year?
Richard Syron, chief executive of Freddie Mac, told FT.com in a View from the Top video interview that the paralysis in some segments of the US housing market had introduced an “enormous amount of fear.”
Starting down the barrel of large mortgage hike might UK consumers cut back on spending now, in anticipation of the incoming drain on their disposable cash?
Well yes. Data out on Friday showed that the British consumer is firmly in the doldrums, with the lowest reading for confidence from GfK’s NOP barometer for almost two years. The second round of interviews for the survey were conducted just days after Northern Rock went cap in hand to the Bank of England. Consumer morale hasn’t been lower since December 2005.