🔐We’re Stuck in a Massive Mortgage Meltdown. How We Got Here Plus Why You Need to Stress Test Your Finances Now

Buying a house is meant to be one of the best moments. Or so I’m told! Sure it’s riddled with stress – but the good sort. It must be so exciting to hold the keys to something you can call your very own. No landlord to answer to and instead of filling their coffers, you’ll be finally filling yours! But right now, being a first-time buyer is about as stressful thing as it gets. Mortgages are disappearing left right and centre and rates are rising. A LOT. Buyers are scrambling to get themselves a mortgage before they vanish into thin air.

These are truly mad times we’re living in. All this is going to hit the housing market hard and some reckon that prices could fall by as much as 10% in the next 2 years. And if you think this is bad, wait till you talk to first-time buyers looking to secure a 95% LTV mortgage. These are gonna be super-duper pricey. Banks are worried about defaults and they’ll be looking to raise rates to protect themselves. 

Anyone who’s younger than mid-40s will quite literally not remember a time when mortgage (and interest) rates were this high. My dad told me the highest mortgage rate he’s ever taken out was back in 2006 and that was for a 5.98% mortgage. Now, you can’t get a 2 year fixed-rate below 6% which, btw is the highest it’s been in 14 years. To put things in perspective, in December this rate was 2.34%!! The BoE’s base rate was 0.1% compared to today’s 2.25%.

High street lenders have stopped accepting new customers and change rates 3x a week because of the massive hike in demand and buyers who are desperately trying to buy their home before existing deals expire. For first-time buyers and those trying to remortgage, it’s a total disaster. While the gov cut stamp duty in its mini-budget (you know, the one that literally exploded markets!) this will do little to stop fears of a mortgage meltdown. 

Goodbye low rates! You’ll be missed. Badly.  

From investors to governments we all thought (wished) that low rates would continue till infinity. Low rates meant we loaded up on debt since it was cheap to do so. And we never thought in a million years that rates would climb to what they were at the start of the millennium. But they’re on the rise. And they’re wreaking havoc.

Rising rates are exposing meany cracks within the economy – just look at the UK’s pension crisis with their LDIs (Liability-driven investment: something so stupidly complex and convoluted) and I bet this isn’t the first incident and it won’t be the last. We aren’t ready for high rates. Our economy and financial structures have adapted for low rates. The system is already starting to break and we’re nowhere near bringing inflation down. 

Many folks who bought during this covid property boom ended up spreading themselves too thin to ensure they got on the property ladder. Now they’re facing higher mortgage rates at a time when food, fuel and utilities are going up as well. It’s important to push yourself a little so that you can jump on your ladder as you can end up missing the boat if you wait too long but there’s also the danger of stretching yourself too thin. And with rates on the rise, this is hitting people where it hurts. 

Some people have had to move to interest-only mortgages which is nasty. It means you’ll constantly be chasing your tail. You won’t be chewing away at the fat loan you owe, only at the ever growing interest. But many are left with no choice. It’s the only way to ride out the storm in the hope that rates will come down – when recession gets bad forcing the Fed to pivot. You know we’re doomed when we’re hoping for a recession so that rates can go lower!

Can your finances survive higher rates? 

The reason why so many people are caught off-guard here by rising mortgage rates is that no one really saw it coming. Or if they did, they turned a blind eye and assumed things (aka rates) will go back to where they were. The ground.  

You’ve gotta take into account the fact that you’ll still be able to meet your monthly payments at a higher rate. Stress test yourself. Just like banks go through stress tests to make sure they’re strong enough to withstand a crisis, you must be sure that your finances are strong enough to be able to withstand something of equal magnitude! Much like we’re facing now. 

My friend and I were chatting about the rising cost of living and the fact that so many have stretched themselves (more like their mortgage) to the limit and many can’t afford rising rates. She said her parents were due for a remortgage. They’ve come off a 2.something% and have hopped onto a 6.39% mortgage! Their mortgage expenses have now tripled. Things are gonna start to crack if they haven’t already done so.  

So you’ve gotta see whether or not your finances can survive rates going higher, like to 8%. If your mortgage payments rise more from here on out, test whether your income and general finances can handle the huge increase in your expenses. For those of you that are fixed on a 2-ish% rate, consider that when you’ll need to remortgage it might be 3x higher than that. Or more. If you need to add more money to your emergency fund so that you’ll still be able to cover your higher payments if you lose or job or something else happens, then do so. Consider side hustles and dividend stocks to boost your income a little.

Silver lining on the cards?

The BoE has a load of deposits from high street banks. NatWest alone has almost £150bn in reserves with the central bank. What these banks do is hand over customers’ deposits (aka our savings sitting in accounts) and they lend it to the BoE to scoop up some interest. I mean why leave money sitting on the table like that, right? 

Well, the BoE might not be having it anymore. They might be about to target ~£10bn of interest on these deposits. Now obviously you’ll know that the BoE is doing this to try and calm markets in response to its mini-budget that caused a financial earthquake.

What this could do for the mortgage market is encourage lenders (banks) to do what they do best: loan out money. If they aren’t getting interest on their cash they’d want to lend it out and make a buck or two. This could be just what the mortgage market needs to get things going again.

Until then, make sure your finances are bullet-proof.

You can never be too prepared.

Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.