Inside the breakdown of the UK’s mortgage machine
Immediately after the UK’s new chancellor Kwasi Kwarteng’s “mini” Budget speech last Friday, Atom Bank chief executive Mark Mullen realised the extent of the chaos that was about to be unleashed and got on the phone to his commercial director.
“I asked to be ready to remove our commercial range from sale because I could see there could be a rush to [lock in fixed rate] mortgages,” said Mullen, whose bank specialises in selling home loans online.
“Contagion can be quite destructive and so our risk was we’d find ourselves swamped with mortgage applications that we don’t have either the capacity or the appetite to write in such a volatile environment.”
Across the country, providers withdrew 1,688 mortgage products, leaving would-be borrowers in limbo and raising fears of a collapse in house prices.
By Monday evening, the first providers had begun to pull products. Lloyds Banking Group — the UK’s largest mortgage provider — withdrew a range of fixed fee products, while Virgin Money, a top ten provider, and Skipton Building Society, both informed brokers they would stop offering new home loans.
A tide of smaller lenders, including Nottingham Building Society, Bank of Ireland, Leeds Building Society and Paragon Bank, also pulled products, citing sharply rising swap rates — which mitigate interest rate risk as banks swap fixed-rate money from borrowers for a floating rate.
“After we saw Virgin and Skipton pull their ranges, we decided we didn’t want to find ourselves on the wrong side of demand,” said the head of a challenger bank.
Throughout Tuesday the largest lenders with the biggest capacity were suddenly inundated with applications. Brokers reported waiting in two-hour queues behind close to 700 other people trying desperately to lock in deals before products were repriced and made more expensive.
“I was literally watching the application numbers by the minute,” said a mortgage executive at one of the 10 largest providers. “If you were graphing it, it was a straight line upwards, it was quite incredible.”
“We saw a threefold increase in existing customers contacting us,” they added. “We had a number believing the tripling of interest rates meant that their mortgage payments would triple.”
Volatility throughout the week remained extreme, said the chief executive of one high street lender, pointing to two and three year swap rates which had come back in by 100bp by Thursday: “That’s a huge move — the kind you see only once or twice in the past 30 years.”
By Thursday, the Financial Conduct Authority had begun asking UK banks about the 2mn borrowers with fixed-term products that might need to remortgage between now and the end of 2024.
The regulator was particularly concerned about borrowers’ ability to pay much higher rates in excess of 5 or 6 per cent — some analysts have suggested that households might face spending between 40 and 50 per cent of their take-home income on mortgage payments within the next year.
But for the banks, the violence with which the market moved has meant they are still scrambling to recover.
“This week caught everyone unaware — I was with the board, and it was a shock,” said the chief executive of a high street bank. “Instability in the market was pretty shocking and a little scary.”
This story originally appeared on: Financial Times - Author:Emma Dunkley
