By
Godfrey Benjamin
December 21st, 2023
Millions of households in the UK are eyeing insolvency as the mortgage crisis in the country looms following the interest rate hike.
The possibility of a “mortgage catastrophe” or crisis as predicted by Britain’s finance minister Jeremy Hunt has added pressure on the shoulders of the government.
The British government is expected to do more for struggling households as millions of homes head toward potential insolvency. Talks about a mortgage catastrophe began after the Bank of England (BoE) hiked interest rates by 50 basis points to 5%. This increase was far bigger than what was expected.
Markedly, this was the BoE’s 13th consecutive interest rate hike and since 2018, this also comes off as the highest level of the base rate. Although it was introduced to lessen inflation, it would have an adverse effect on several homeowners. This is because the interest rates on many mortgages in the United Kingdom are directly related to the central bank’s base rate.
Renters are not left behind as they may be required to pay more. Buy-to-let landlords would likely pass on higher mortgage repayments to these renters. Research results from a leading independent think tank the National Institute of Economic and Social Research (NIESR) show that 1.2 million UK households, representing 4% of the entire Britain households, would have depleted their savings by the end of the year owing to the high mortgage repayment.
If this happens eventually, that would mean that the percentage of insolvent households will climb to about 30%. The largest impacted areas would be Wales and northeast England, per the NIESR research. Max Mosley, an economist at NIESR mentioned that the government should not expect certain households to withstand the impact of the interest rate hike.
“The rise in interest rates to 5% will push millions of households with mortgages towards the brink of insolvency,” said Mosley. “No lender would expect a household to withstand a shock of this magnitude, so the government shouldn’t either.”
Mortgage Crisis: Lenders and Banks Agree on Solutions
Amidst all these, Hunt had a meeting with top banks and building societies to discuss the mortgage repayment crisis. Hunt mentioned that during the meeting which was held on Friday, June 23rd, banks, mortgage lenders and the Financial Conduct Authority agreed on three measures to salvage the situation.
One of them is a temporary change to mortgage terms and a promise that consumers’ credit scores would not be affected by discussions with their lenders.
A grace period of 12 months was agreed upon by lenders for those households that stand the chance of losing their homes. After this time, there would be a repossession without consent. The finance minister is positive that these measures would offer comfort to the affected homes and give them ample time to come to a resolution.
“We won’t flinch in our resolve because we know that getting rid of high inflation from our economy is the only way that we can ultimately relieve pressure on family finances and businesses,” Hunt said.