UK Home Owners Unable to Refinance Mortgages As Fixed Rates Expire During 2008

By: Nadeem_Walayat

Nearly 1.5 million homeowners fixed rate mortgages taken out during the past 3 years reset to much higher variable interest rates during 2008. Now Clive Briault of the FSA has waded in with a warning that borrowers will find it increasingly difficult to obtain further favorable refinancing due to the tightening in the credit markets as the now global bad debts credit crisis continues to unfold.

Clive Briault, the Managing Director of Retail Markets, FSA stated: Current and prospective market conditions also raise some important risks for consumers: if their financial plans depended on cheap and abundant credit, the absence of those conditions is likely to cause significant consumer stress. And, as with lenders, the impact of this will be accentuated further if house prices fall, or even if they increase by less than borrowers had hoped. From our Product Sales Data, we know that at least 1.4 million short-term fixed rates will end in 2008.

Many of these borrowers are on relatively high loan-to-value ratios or income multiples and will find it difficult (if not impossible) to refinance their mortgage on favourable terms, which will leave them facing a significantly higher interest rate on their borrowings, which may prove too much for many of them to afford. Moreover, sub-prime borrowers may not have access to the market at any price, at least until the normal market mechanism of risk-adjusted pricing returns.

This should not come as a surprise to readers of my articles over the last 9 months, which have specifically warned of a housing slump during 2008 that would be deepened by expiring fixed rate deals to higher variable interest rates without further availability of favourable fixed rates, thus resulting in an worsening in the already extreme levels of affordability.

The crunch point for UK housing market will come following the summer strength, when affordability concerns not only due to 5.50% interest rates, but also prospects of further rises to come later in the year are likely to trigger the unraveling of UK's housing market boom. Especially as many of the low initial interest rate fixed deals that house buyers have enjoyed during the boom have now been removed in light of rising interest rates and tightening world wide credit markets. - 1st May 2007

UK Adjustable Rate Mortgages (Arms) & Liquidity

If the Adjustable Rate Mortgage Resets are termed as Arm-ageddon in the US, then here in the UK they should be termed as Doomsday, as the more than 90% of ALL mortgages are adjustable rate or floating rate mortgages in the UK. The short-term fixed deals taken out over recent years are now resetting with a vengeance. With UK interest rates at 5.75%, and a chance (albeit diminishing one) of a further rise to 6% in October 2007 ( UK Inflation CPI Falls But Interest Rates Set to Rise to 6% By October 2007 18th July 07). The UK Arm resets will have a significant impact on the UK consumer and send the UK Housing market into a downward spiral. To make matters worse the credit crunch ensures that lending criteria will be much stricter with much higher interest rates charged than the base rate would imply, i.e. a greater spread between the Bank of England's rate and the mortgage interest rates.

Already the latest figures for new mortgage approvals for July show a 27% fall over the same period a year ago as liquidity continues to tighten with borrowers facing much tougher refinancing conditions. - 22nd August 07

By Nadeem Walayat
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Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 100 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

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