London (Reuters) – Soaring mortgage costs have raised concerns in Britain, but banks appear optimistic about borrowers’ ability to repay for the time being.

The sharp rise in key rates by the Bank of England (BoE), which reached 5% on Thursday, could put this optimism to the test, especially since consumers are already having to deal with ever-higher prices.

Here are some tools available to banks to limit turbulence in the British property market, which totals 1,700 billion pounds (1,974.53 billion euros).

WHY HAVE MORTGAGE RATES SOAR?

Mortgages can be fixed or variable rates, but both are exposed to BoE monetary policy. Variable rates are indexed to the BoE key rate: each time the central bank raises its rates, the increase is automatically passed on to borrowers.

Fixed rates are only fixed for a period of two to five years, and are calculated on the basis of interest rate swaps, instruments that reflect investors’ expectations of future BoE key rates.

However, the persistence of British inflation has pushed up market expectations: two-year and five-year swaps reached 5.99% and 5.26% respectively on Thursday, according to data from Refinitiv Eikon, a record level that banks say they have to pass on borrowing rates to avoid recording losses on their mortgage loans.

WHO IS AT RISK?

Banks assure that only a small number of customers are facing repayment difficulties.

One of the reasons for this resistance is a solid labor market, which limits the loss of income, but any significant increase in unemployment could change the situation.

Of nearly 9 million residential mortgages, 800,000 are expected to cease being repaid at fixed rates in the second half of 2023, and 1.6 million households will be affected in 2024, according to data from UK Finance, an industry association. banking.

A survey by the charity StepChange, published Thursday, also shows that 45% of borrowers, or 6.9 million people, have struggled to honor their bills and loans.

WILL THERE BE MASSIVE SEIZURES?

According to UK Finance, around 750 mortgaged properties were foreclosed in the first three months of the year, a 50% increase over a quarter, but this number remains well below the levels seen in previous crises, while only 0, 8% of outstanding mortgages are in arrears.

Banks say tougher affordability criteria, flexible grace periods for customers and a change in culture, in a banking industry plagued by scandals, are limiting the risks of mass foreclosures.

WHAT ARE BANKS DOING TO HELP THEIR CUSTOMERS?

The major banks have offered assistance to customers they identify as needing support, which may take the form of financial capacity checks, temporary payment suspensions, principal repayment suspensions, or an extension of repayment periods.

WHAT COULD THE GOVERNMENT ASK OF BANKS?

UK Finance Minister Jeremy Hunt is due to meet with bank bosses on Friday to discuss the matter.

The minister said the government would not offer significant financial aid and that banks should help borrowers facing higher interest rates, in line with their commitments.

During the pandemic, the government had ordered banks to offer repayment suspensions to borrowers, but the industry believes that further suspensions could have unintended consequences.

The extension of the periods during which the rates are fixed could be a track, as could a return of aid to purchase for first-time buyers.

(Report Sinead Cruise, Iain Withers, Corentin Chapron, edited by Kate Entringer)

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