The City watchdog is asking banks how they plan to step in and support struggling mortgage borrowers, as lenders such as Virgin Money relaunch home loans at higher rates following a spate of withdrawals sparked by this week’s market meltdown.

Supervisors at the Financial Conduct Authority (FCA) have been holding talks with lenders to understand how their mortgage customers are faring and the kind of options that are on the table that would give struggling homeowners some breathing space.

Brokers estimate that about 1.9 million mortgage borrowers are due to come out of fixed-rate deals next year, raising fears that homeowners could struggle to afford higher monthly payments on new loans.

Chris Sykes, a mortgage broker at Private Finance, said rising rates would mean some customers “will have to make cutbacks” on their overall spending.

“I’ve quoted some clients on interest-only products [that are worth] three times their original mortgage payment moving forward,” he said. “I’ve quoted some clients thousands more than their current mortgage payment for a new product.”

First-time buyers with small deposits were facing interest rates upward of 6%. “It could be in some circumstances significantly more expensive than renting now,” Sykes said.

Virgin was one of the first to stop issuing new mortgages on Monday, after the government’s mini-budget sent sterling rates to record lows and UK bond prices plunging, making it difficult for banks to price their home loans accurately. A string of rivals followed, resulting in 40% of mortgage products being pulled from the market by Thursday.

However, with some calm returning to markets, Virgin relaunched mortgage products on Friday morning, albeit with interest rates starting at 5.2%-6.8%. That compares with rates of about 4% at the start of the week.

Other lenders have been cautiously reentering the market, but – again – at higher rates. HSBC, for example, withdrew its products for only a few hours this week but raised the interest rates to about 5%, brokers confirmed.

But even at higher interest rates, new and existing homeowners are expected to flood lenders with applications, fearful that the Bank of England could raise rates even further.

While the central bank’s base rate – which helps to determine what commercial banks charge – is currently at 2.25%, some analysts believe that it could reach 6% next year.

Some lenders have bulked up their mortgage teams in response to demand. Virgin is understood to be shifting hundreds of staff from other parts of the bank to its home loans division to field calls from customers hoping to secure a loan before rates rise even further.

However, brokers warned that any further chaos across UK markets could force banks to halt lending again and hike rates.

“There is always a risk in the current market,” said Nicholas Mendes of the mortgage broker John Charcol. “Brokers will be looking to manage client expectations, but lenders can give little or no notice.”


Kalyeena Makortoff Banking correspondent

The GuardianTramp

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