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Analysis: British banks’ mortgage payday comes with sting in the tail

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LONDON (Reuters) – British households are entering a winter of soaring energy costs, a plummeting currency and near-double-digit inflation as mortgage prices surge after a decade of stagnation , the country’s banks are about to have a great payday.

Banks are finding the mortgage market to be doing well after years of low mortgage rates, but high mortgage bills pose a problem for cash-strapped customers. We also recognize that it can happen.

Some investors and analysts have already questioned whether bank risk models are doing their job of identifying profitable loans that could cost lenders huge losses in the long run. is presenting.

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Goodbody banking analyst John Cronin said: “The problem is that people who are refinancing at 6%, or were at 2%, are suffering massive cash outflows to support their mortgage payments. ‘ said.

“My concern is that the bank’s delivery model does not adequately reflect the challenges of affordability in a context of low unemployment.”

The UK mortgage market was thrown into turmoil last month when the country’s new finance minister, Kwasi Kwarten, announced a so-called ‘mini-budget’ that promised billions of pounds of outstanding tax relief.

Markets were horrified by the prospect that this would mean massive government borrowing, a sharp drop in UK bond prices and increased bets on higher interest rates.

The disruption caused banks to withdraw about 1,700 mortgage products in one week. This represents approximately 40% of the available products.

A senior banker said that in the week after Kwarteng’s mini-budget, there were three times more mortgage applications than usual, and staff had to be redeployed to handle the surge in customer calls. rice field.

Some of the trades that were withdrawn were gradually reintroduced this week at rates that were 1-2 points higher.

Two- and five-year fixed-rate mortgage averages were above 6% as of Friday, the first time since 2008 and 2010, respectively, according to data provider Moneyfacts.

The average interest rate on these was around 4.75% on Sept. 23, before the Kwarteng bailout, and between 2-3% in October last year, according to Moneyfacts data.

Reuters Graphics

Refinitiv data shows banks are raising mortgage rates ahead of an expected Bank of England interest rate hike, with financial market benchmark interest rates reaching nearly 6% next year.

However, rising interest rates will hit borrowers hard.

“Anyone who rolls off from a fixed rate to a variable rate, or from a fixed rate to a new fixed rate, will see their monthly payments increase dramatically.” Investment Manager M&G Public Bonds .

“It’s hard to imagine that economic activity won’t slow down significantly in the coming months, and indeed through 2023,” he added.

Mortgage payments averaged about 20% of total household income in June, according to property market consultancy Built Place. If mortgage rates rise to 6%, he could rise to about 27%, the highest level since the early 1990s, consultants say.

Mortgage market conditions were a “hot topic” discussed at a meeting with bank executives and Quarteng on Thursday, and affordability was a “top concern”, according to a source briefed on the discussion. read more

short-term gain, long-term pain

Banks benefit from higher interest rates because they profit from the difference between what they charge on loans and what they pay on deposits.

Jefferies Analysts Name Three of the UK’s Largest Retail Banks – NatWest (NWG.L)Royce (LLOY.L) and Barclays (BARC.L) – Increased margins, including mortgages, to add £12bn ($13.43bn) to gross income by 2024. These banks reported revenue of £48bn in 2021.

Lloyd’s Chief Executive Officer Charlie Nunn told a banking conference last month that before Kwarteng’s mini-budget, the bank earned about £175m for every 25 basis points rise in interest rates.

Analysts say bank loan delinquencies have remained very low during and after the pandemic, but that could change with significant housing and utility costs.

Banking analysts at RBC said in a report that UK banks are expected to have “very good next few quarters” by a “challenging” 2023.

Taking into account the latest mortgage pricing, RBC has calculated that re-mortgaging households will see an increase in mortgage payments of between £470 and £250 per month, depending on whether they have previously refinanced. .

RBC analysts say private rent could also rise by £280 a month if landlords pass on the cost of higher mortgages to tenants.

Rising mortgage rates will hit the finances of millions of households, said Sue Anderson, head of media at the debt charity StepChange.

“Our research suggests that many households cannot handle this extra pressure. Nearly one person is struggling to keep up with household expenses and credit agreements.”

British lenders have spoken with industry trade body UK Finance about leniency options for struggling customers, the group told Reuters.

Senior bankers said mortgage default rates remain low, but mortgages are usually the last commitment consumers lag behind.They’re not happy.

“We expect it to be bigger than usual, but it hasn’t started yet.”

($1 = £0.8937)

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Reporting by Iin Withers, Sinead Cruise and Lawrence White. Additional reporting by Andy Bruce in London.Editing by Jane Merriman

Our criteria: Thomson Reuters Trust Principles.

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