Connect with us

Business

Analysis – UK banks’ mortgage payday comes with a sting in the tail By Reuters

Avatar

Published

on


© Reuters. FILE PHOTO: Estate agents sales and rent signs affixed to a railing outside an apartment building in South London, Britain, September 23, 2021. REUTERS/Hannah McKay/File Photo

By Ian Withers, Sinead Cruz and Lawrence White

LONDON (Reuters) – As British households approach a winter marked by rising energy costs, currency depreciation and near double-digit inflation, the country’s banks are heading for a good payday as mortgage rates soar after a decade of stagnation.

Banks are finding the housing loan market stacked in their favor after years of low mortgage rates, but they also recognize that larger mortgage bills can cause problems for cash-strapped customers.

Some investors and analysts are already questioning whether banks’ risk models are up to the task of determining which loans will pay off than those that may cost lenders dearly in the long run.

Advertisement

“The problem is that people who refinance at 6%, which was 2% for example, are going to have massive cash outflows to support those mortgage payments,” said John Cronin, banking analyst at Goodbody.

“My concern is that the banks’ submission models do not adequately reflect the challenge of affordability in the context of low unemployment.”

Britain’s mortgage market plunged into chaos last month when the country’s new finance minister Kwasi Quarting unveiled a so-called “mini-budget” that promised billions of pounds of unfunded tax cuts.

Markets feared that this would mean heavy government borrowing, driving down UK government bond prices, and pushing bets on higher interest rates.

The turmoil caused banks to withdraw nearly 1,700 mortgage products within a week – equivalent to about 40% of available products – sparking a rush among desperate consumers to secure the cheapest deals possible.

Advertisement

A senior banker said they saw three times more mortgage applications than usual in the week after Quarting’s mini-budget, and had to redeploy staff to deal with a sudden surge in customer calls.

Some deals that were gradually withdrawn were reintroduced this week at rates increasing between one and two percentage points.

Data provider Moneyfacts said the average two- and five-year fixed-rate mortgage was above 6% as of Friday — the first time since 2008 and 2010, respectively.

Moneyfacts data showed that those average rates were about 4.75% on September 23 before Kwarteng’s financial donations, and were between 2-3% in October of last year.

Chart: High UK Mortgage Rates https://graphics.reuters.com/BRITAIN-BANKS/myvmndxdgpr/chart.png

Advertisement

Banks are raising mortgage rates to pre-empt expected interest rate increases from the Bank of England, as money market rates at benchmark rates reach nearly 6% next year, based on Refinitiv data.

But higher rates will hit borrowers hard.

said Jim Levis, CIO of General Fixed Income at M&G Investment Manager.

“It’s hard to see that we won’t see a significant slowdown in economic activity over the coming months and indeed throughout 2023,” he added.

Mortgage payments as a percentage of total household income averaged about 20% in June, according to Belt Place, a real estate market advisory firm. The advisory said it could rise to about 27% – the highest since the early 1990s – if mortgage rates rise to 6%.

Advertisement

Mortgage market conditions were a “hot topic” for discussion at a meeting between bank managers and Quarting on Thursday – with affordability the “biggest concern,” according to a source familiar with the discussions.

Short term gains, long term pain

Banks benefit from higher interest rates because they make money from the difference between what they charge for lending and paying for deposits.

Jefferies analysts have estimated that three of Britain’s largest retail banks – NatWest, Lloyds (LON:) and Barclays (LON 🙂 – Its revenue will collectively grow by 12 billion pounds ($13.43 billion) by 2024 due to expanding margins, including mortgages. These banks achieved revenues of 48 billion pounds in 2021.

Lloyds chief executive Charlie Noone said at a banking conference last month – ahead of Kwarteng’s mini budget – the lender took about £175m in revenue for every 25 basis point rate increase – assuming it only passed half of the increases to savers.

Advertisement

Analysts said defaults on bank loans remained remarkably low during and after the pandemic, but that higher housing costs – built up due to higher energy bills – could change that.

RBC bank analysts said in a note that British banks are expected to have a “very good next two quarters” ahead of a “challenging” 2023.

Taking into account recent mortgage rates, RBC calculates that mortgage payments will increase by between £470 and £250 per month for household re-mortgages depending on whether they refinance before.

RBC analysts said private rents could also rise by as much as £280 a month if landlords pay higher mortgage costs to tenants.

Sue Anderson, head of media for debt charity Step Change, said rising mortgage rates would be a blow to the finances of millions of families.

Advertisement

“Our research indicates that many families cannot handle this extra stress – nearly one in two British adults are struggling to keep up with family bills and credit obligations, up from 30% in October 2021 and 15% in March 2020.”

The trade body told Reuters that British lenders had held talks with industry trade body UK Finance about deductible options for distressed clients, adding that it was ready to respond as required.

The chief banker said that while mortgage defaults remained low – home loans were usually the last commitment consumers defaulted on – they were not satisfied with it.

“We expect it to be on a larger scale than usual, and it hasn’t started yet.”

(dollar = 0.8937 pounds)

Advertisement

Source link

Continue Reading
Advertisement
Click to comment

Leave a Reply

Your email address will not be published.

Business

Tesla offers discounts. Are drivers bothering her cars?

Avatar

Published

on

headwind for

Tesla

– And his stock – seems to be growing. The latest might be among the company’s biggest concerns.

Bernstein analyst Tony Sacconaghi Tuesday wrote that

Advertisement

Tesla

(Stock ticker: TSLA) “There appears to be a growing demand problem.”

Source link

Advertisement
Continue Reading

Business

US Banks Warn of Recession as Inflation Hurts Consumers Stocks Fall By Reuters

Avatar

Published

on


© Reuters. FILE PHOTO: Workers are seen in the windows of the JP Morgan offices in Canary Wharf, London on September 19, 2013. REUTERS/Neil Hall/File Photo

By Saeed Azhar and Noor Zainab Hussain

NEW YORK (Reuters) – The largest U.S. banks are bracing for a downturn in the economy next year as inflation threatens consumer demand, executives said on Tuesday.

Consumers and businesses are doing well, Jamie Dimon, CEO of JPMorgan Chase & Co (NYSE: NYSE), told CNBC, but noted that may not last for much longer as the economy slows and inflation erodes consumer spending power.

“Those things could derail the economy and cause this moderate to severe recession that people are concerned about,” he said.

Advertisement

He told CNBC that consumers have $1.5 trillion in excess savings from pandemic stimulus programs, but they could run out some time in the middle of 2023. Dimon also said the Fed could pause for three to six months after raising benchmark interest rates to 5%, But this may “not be enough” to rein in high inflation.

The US central bank last month raised interest rates by 75 basis points during its fourth consecutive meeting to 3.75%-4%, but also signaled hopes of switching to smaller increases as soon as at its next meeting.

Major bank stocks fell sharply the next day after a group of senior bankers outlined risks to the economy. Bank of America (NYSE:) stock fell more than 4%. Goldman Sachs Group Inc (NYSE:) and Morgan Stanley (NYSE::) both fell by more than 2% and Citigroup Inc (NYSE:) fell more than 1%.

Bank of America CEO Brian Moynihan told investors at a Goldman Sachs financial conference that the bank’s research shows “negative growth” in the first part of 2023, but that the contraction will be “moderate.”

Moynihan said the lender’s investment banking fees will likely fall 55% to 60% in the fourth quarter from a year earlier, while trading revenue will likely rise 10% to 15%.

Advertisement

“Economic growth is slowing,” Goldman Sachs CEO David Solomon said at the same conference. “When I talk to our customers, they sound very careful.”

He said the job market in the banking sector remains “surprisingly tight” and competition for talent “as tough as ever”.

However, some banks are cutting staff. A source familiar with the company’s plans said Tuesday that Morgan Stanley has cut about 2% of its workforce. The job cuts, first reported by CNBC, affected about 1,600 jobs and track workforce cuts at Goldman and Citigroup.

Elsewhere on Wall Street, BlackRock Inc., the world’s largest asset manager (NYSE:) froze hiring except for critical roles, CFO Gary Shedlin said.

“We’re trying to be more prudent,” he said.

Advertisement

Source link

Continue Reading

Business

Stocks fluctuate as investors ponder the course of prices

Avatar

Published

on

Next week’s Federal Reserve decision and inflation figures may provide more clarity on interest rates

Source link

Continue Reading
Advertisement

Trending