Mortgage market mayhem – what’s going on and what it means for you

It’s been an uncertain and worrying time for anyone with an eye on the mortgage market. Whether you’re in the process of buying or you’re in the final months of a fixed-rate deal, the chaos that unfolded in the wake of the mini-budget might have raised both your mortgage rate and your blood-pressure.

It’s worth getting to grips with what’s been going on, and where you might stand now.

This article isn’t personal advice. Yields aren’t a reliable indicator of future income and past performance isn’t a guide to the future. If you’re not sure what’s right for you, seek advice.

Mortgage market mayhem – what caused it?

The mini-budget was the catalyst for chaos, because it outlined unfunded tax cuts, that added another £70 billion to planned debt sales this financial year. This rattled the bond market and sent UK government debt (known as gilts) over a cliff.

Because bonds pay a fixed rate of income, when bond prices fall, yields automatically rise (because the yield is just a way of expressing the fixed rate of income as a percentage of whatever you paid for the bond). So, yields soared.

This matters for mortgages, because yields are used to guide mortgage prices. Essentially, lenders offering fixed-rate mortgages will swap a floating rate for a fixed rate – on the swaps market. The higher bond yields are, and the more volatility that’s expected, the higher the fixed rate the institution will demand in order to make it worth them taking the risk on.

In the wake of the mini-budget, yields moved so far and so fast, and there was so much uncertainty about when they would stop spiking, that pricing swaps became impossible. That meant they halted, and around a quarter of all mortgages were withdrawn from sale.

Now the dust is settling, they’re coming back to the market – but at a much higher level. The average two-year fix, which was 4.74% on the day of the mini-budget, hit 6.16% by Friday 7 October. Five-year fixed rates reflected expectations that rates will likely drop back after the next couple of years – with average rates at 6.07%.

But all the chaos is still relatively recent, so lenders could well be more cautious right now. If we don’t get any nasty surprises or big market movements in the immediate future, we could see rates pull back very slightly and of course there are no guarantees.

What this means for new buyers

If you haven’t already agreed your mortgage, if you’re planning to trade up or buy a first property, you might need to rethink your plans.

Higher house prices, alongside higher interest rates and higher bills could mean stretching your finances more than you’re prepared to do at such an uncertain time. Even dedicated buyers could run into difficulties securing a loan when potential lenders factor all this into affordability calculations.

In some cases, the stamp duty cut might help close the gap, because it means you need to borrow less. Otherwise, if there’s no other way to boost your deposit, you might need to compromise over where or what type of property you buy.

Of course, in an uncertain market, it’s essential to be able to live with those compromises so you won’t be forced to move again in what could be a difficult market.

What it means for remortgagers

If a remortgage is looming, it can be incredibly worrying. If you have six months or less to run on your deal, it’s worth shopping around for a new rate now. That’s because you can lock in a deal up to six months in advance with some lenders and protect yourself from rises that are expected further down the track.

Rates have risen so much in the years since a lot of people fixed that they might well be worried they can’t stretch to the extra cost. In many cases, their household finances only worked because they were paying a rock-bottom rate on their mortgage.

If you’re in this position, you have a few options.

If you haven’t yet gone through a cost-cutting process, you might be able to budget your way through by cutting out all non-essentials and shopping around.

If you’ve already done this, you could be able to cut your mortgage payments by hunting down the cheapest possible deal.

If this is still too expensive, you can consider options like extending the term of your mortgage. You’ll pay more interest overall because you’re spreading your loan over a longer period, but it can bring your mortgage payments down.

If you make changes to your mortgage, you need to understand the implications. However, it’s always worth bearing in mind that this doesn’t have to be a long-term solution. If you fix for a few years on this basis, the world could’ve changed significantly by the time you come to remortgage again. By that time, you might even be able to move back to a shorter term, but of course nothing is certain.

For some, even the most strenuous efforts to make ends meet will fall short, and the conclusion could mean selling up and moving somewhere more affordable.

It can be a horrible wrench, and it’s not the kind of decision you want to rush into, but it’s vital not to put it off either. The sooner you act, the fewer problems you will build up. And once the burden of an unaffordable mortgage has been lifted, it can open up so many more possibilities.

What it means for the market

If too many people can’t buy, or there are forced sellers, it will impact the overall market. It’s hard to see how it can avoid softening from here, and the risks are building of substantial price falls.

If you’re in a property you can afford, with no plans to move in the immediate future, it’s less of a concern. However, if you’re planning a move in the short term, it might make you rethink stretching yourself to afford a property you can’t see yourself in a few years down the track.

Editor's choice: our weekly email

Sign up to receive the week’s top investment stories from Hargreaves Lansdown

Please correct the following errors before you continue:

Existing client? Please log in to your account to automatically fill in the details below.

Title:

Please select... Mr Mrs Miss Ms Mx Dr Sir Rev

First name:

Last name:

Email address:

Main phone number: (optional)

Mobile phone number: (optional)

Date of birth: (optional)

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Title:

First name:

Last name:

Address:

Email address:

Where did you hear about us?

Please select... Recommendation from a friend HL mention on another website Advert on another website Mobile application Advert in the press Existing client Search Engine / Research HL mention in the media

Hargreaves Lansdown would like to contact you about the services we offer which may be of interest to you. We explain how we use your personal data in our Privacy Policy.

If you would rather not hear from us, please tick the relevant box(es) below:

Email - no thanks, please don't contact me via email

Post - no thanks, please don't contact me via post

Phone - no thanks, please don't contact me via phone

Register

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

Your postcode ends:

This is my postcode

Not your postcode? Enter your full address.

Hargreaves Lansdown PLC group companies will usually send you further information by post and/or email about our products and services. If you would prefer not to receive this, please do let us know. We will not sell or trade your personal data.