Houses pictured on June 8, 2023 in Halifax, United Kingdom. UK borrowers face significantly higher mortgage costs.

Mike Kemp | In the pictures | Getty Images

LONDON – British borrowers face a cliff that could damage the economy as rising mortgage costs hit business recovery and the number of products available shrinks, experts warned on Monday.

New figures from financial information company Moneyfacts showed that the average two-year fixed interest rate on a residential property in Britain rose to 6.01% from 5.98% on Friday, the highest level since 1 December.

The increase at the end of 2022 came in the wake of Govt market boisterous mini-budget. Previously, Moneyfacts reported that two-year fixed rates were last above 6% in November 2008.

The number of home mortgage products available also fell, from 5,264 on May 1 to 4,683.

Martin Stewart, director of mortgage consultancy London Money, said the past nine months had been “seismic” for the mortgage and housing sector, “on par with the financial crisis”, albeit with different causes.

“The market is broken and probably broken. We’ve seen evidence of advisers standing in queues with 2,000 others all trying to secure something that may not actually exist before they get to the front of the queue,” Stewart told CNBC.

“Pretty much everything starts with a 5 now… for context, two years ago everything started with a 1 or lower.

The average rate for a five-year mortgage is currently 5.67%, according to Moneyfacts.

Asked about support for struggling households on Monday, Prime Minister Rishi Sunak told ITV’s Good Morning Britain that the government’s priority was to halve inflation and it had to “stick to the plan”.

Banks included HSBC and Santander to have temporarily drawn mortgage products in recent weeks amid market uncertainty.

It comes as a short-term UK government bond yields is rising, with the 2-year yield hitting a fresh 15-year high on Monday.

Markets are valuing top interest rates at nearly 6%, up from the current 4.5%. Strong labor market report June 13 sent rate expectations higher, with the Bank of England announcing its latest interest rate decision on Thursday after enacting its 12th hike in a row in May.

Inflation in the UK, meanwhile, remains among the highest of any developed economy 8.7%with representatives of the central bank warning of secondary effectsincluding price fixing and higher wages, could keep it higher for longer.

“I think the worst of the mortgage crisis is ahead,” said Viraj Patel, chief strategist at Vanda Research. He noted that more than 50% of households are still remortgaging at higher rates, which will add stress to the housing market and the broader economy.

Patel said he expects “most of the consumer slowdown coming from higher mortgage costs” to hit home in the second half of 2023.

“BoE and markets need to be aware of long and volatile monetary policy lags – with the effects of past rate hikes still not fully felt,” he told CNBC.

Britain’s Financial Conduct Authority warned in January more than 750,000 households were at risk of default as rates rose.

Patel said he believed there was a “real risk of failure”. “But he remembers that the BoE has much better oversight. I’m more worried about secondary effects, consumers spending less and possibly overextending non-housing loans,” he added.

London Money’s Martin Stewart said lenders were approaching advisers up to a year earlier than they normally would, with attitudes ranging from “desperation” to pragmatism.

“We are now in the unenviable position of staring over an abyss where the bodies of over-indebted, under-saved, discretionary home owners, renters and business owners are beginning to pile up,” he said.

While forecasts for the UK economy do turned more positive in recent months, Stewart said he expected the personal finance decisions made by so many borrowers to have a macro impact.

“Many borrowers are telling us they will have to give something up to adjust to the new higher payment,” he said. “Unfortunately, that’s how recessions start.

— CNBC’s Ganesh Rao contributed to this report

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