BANKING
2m variable rate mortgage holders face a hike in payments
With economists predicting that the Bank of England will increase interest rates by 0.5% for the second consecutive month as rate-setters look to tackle inflation, 2m homeowners are set to be hit with a further hike in their mortgage payments. With inflation hitting 10.1% in July, forecasters say the Bank’s Monetary Policy Committee (MPC) is likely to put interest rates up from 1.75% to 2.25% when it meets on September 15. Once banks pass this rate rise on, the 2m households on standard variable rate or tracker rate mortgage deals with the average mortgage of £170,301 will be charged an extra £42 a month, or £504 a year, on their repayments. Former MPC member Andrew Sentance, now a senior adviser to Cambridge Econometrics, says the Bank’s base rate may need to rise to 3% or 4% because policy makers have “fallen behind the curve.”
Specialist mortgage lending set to triple by 2030
Specialist residential mortgage lending is on track to triple by 2030, according to a new study by Together. It predicts that specialist residential mortgage lending will rise from £5bn to £16bn by 2030, while the market as a whole will expand by 56% to £400bn in the next eight years. The rise comes as traditional working and living patterns continue to shift and homeowners increasingly grapple with rising living costs, leaving more people dependent on specialists. The study predicts as many as 500,000 mortgage applications will be refused without specialist lending, doubling the market share to 4% of the overall mortgage market by 2030. Gerald Grimes of Together said: “The UK's mainstream mortgage market just isn't adapting fast enough to how we live."
Homeowners can lock in new deals earlier
Three high street banks have increased how far in advance mortgage borrowers can lock in a deal. Barclays, First Direct, and NatWest customers will now be able to begin a “product transfer” between four and six months before their current deal comes up for renewal. Under the old rules, this was around three months before renewal. Co-op Bank and HSBC have also told MoneySavingExpert they will bring in similar changes shortly - but didn't say when.
FINANCIAL SERVICES
Truss' plans to merge City regulators draws criticism
Conservative leadership frontrunner Liz Truss is said to be considering a plan to merge financial regulators that would see the Financial Conduct Authority (FCA), Prudential Regulation Authority (PRA) and Payments Systems Regulator become a single body. However, former Business Secretary Vince Cable has warned that it would be a mistake and “dangerous” to reverse reforms that saw the PRA and FCA created as part of a post-financial crisis overhaul. Simon Morris, a financial services partner at law firm CMS, also questioned the merit of the plan, saying: “Crashing together the PRA and the FCA would massively distract management focus and disrupt day-to-day operations.” Meanwhile, wealth manager Gina Miller, who has campaigned for reform of the FCA, says the next Prime Minister should instead launch an independent review to examine the “pros and cons of breaking the FCA into smaller specialist regulators.” She also voiced concern over how a “mega regulator” could improve competency and consumer protection. Mark Bishop, a campaigner for regulatory reform, said: “We tried the ‘omni-regulator’ option before and it led to the global financial crisis,” while Abhishek Sachdev, chief executive of financial advisory service Vedanta Hedging, warned: “There are lots of examples of failure of the FCA, but merging them will solve nothing.” An FT editorial questions the impact the reform could have, saying “rearranging deckchairs achieves little other than uncertainty and cost, for both regulators and the regulated.” Meanwhile, the paper’s Cat Rutter Pooley says that while there are arguments in favour of a catch-all regulator, “any shake-up would be hugely diverting and consuming.” Ms Truss’ merger plan has won the support of former Lloyds chairman Lord Blackwell, however. He said in the current format, the watchdogs frequently "conflict or pull in different directions" and "leave it to the big institutions they're regulating to sort out the conflict."
Lloyd’s of London tells insurers to halt covering state-backed cyber-attacks
Lloyd’s of London has said its insurers will be required to stop covering state-backed cyber-attacks in their standard cyber insurance policies. The insurer warned that a large-scale cyber-attack launched by a foreign power could expose underwriters to systemic risks, due to the damage such attacks can cause and their ability to spread on a widespread basis. The insurance marketplace said: “In particular, the ability of hostile actors to easily disseminate an attack, the ability for harmful code to spread, and the critical dependency that societies have on their IT infrastructure, including to operate physical assets, means that losses have the potential to greatly exceed what the insurance market is able to absorb.”
REAL ESTATE
Buyers warned over Bank of Mum and Dad loans
Homebuyers who receive financial assistance from their parents risk limiting their borrowing options and could face a massive tax bill as a result. Last year, more than half of under-35s received a gift or loan from their parents, according to insurer Legal & General, with total gifts reaching nearly £10bn. Meanwhile, YouGov data shows that 24% of people buying their first property since 2020 have help from their family, up from 10% a decade earlier. However, a growing number of parents are reluctant hand over their savings without having a financial agreement in place. Law firm JMW Solicitors has seen a 29% increase in enquiries about pre and post-nuptial agreements, while a poll from mortgage lender Generation Home found that parents are twice as likely to help their children if the cash is structured as a loan as opposed to a gift. Experts warn that this may hinder the buyer, with David Hollingworth of broker L&C Mortgages saying many lenders “would typically require that the deposit is a gift, not a loan.” With very few lenders accepting loan agreements, Chris Sykes of broker Private Finance warns that people who take this route “risk limiting their options as a buyer.” Tax also becomes an issue, with lending money for a deposit as opposed to gifting meaning it would remain in the parent’s estate and thus subject to inheritance tax.
RETAIL
AO World slumps to loss on higher costs
AO World has posted a £37m statutory pre-tax loss for the year ending 31 March, having fallen from a £20m profit a year ago. The group's operating loss came in at £32m. The white goods retailer said the annual loss was partly driven by headwinds from global supply chain disruption, labour shortages and cost of living pressures hitting consumer sentiment.
Made.com considers emergency share sale
Made.com is considering an emergency share sale to shore up its balance sheet - just over a year after its £755m stock exchange flotation. Last month, Made issued a profit warning as falling consumer confidence and spending due to sky-rocketing inflation sent its sales plunging. Made has also appointed advisers to explore selling the business to a trade buyer.
ECONOMY
Truss warned of ‘black hole’ in tax plan
With the Office for Budget Responsibility (OBR) set to issue an updated forecast of Britain’s economy and public finances next month, experts expect the Budget watchdog to say Government borrowing will increase because of high inflation and a potential recession. This could hit Conservative leadership candidate Liz Truss’ plan to cut taxes, with the Foreign Secretary basing her plans on the assumption that there is £30bn of headroom in public finances. Economists say this headroom is likely to be cut by half or more, meaning Ms Truss would have to scale back her tax policies or borrow more. Gemma Tetlow of the Institute for Government said that while Ms Truss and leadership rival Rishi Sunak have been pointing to the £30bn of headroom in the last forecast, “it seems very likely that given what we have learned since then, a good chunk of that headroom would have gone.” The Institute for Fiscal Studies has also calculated that borrowing this year will be £16bn higher than forecast, and £23bn higher next year. However, it also suggested that with inflation driving higher tax revenues, the headroom for 2024/25 may be roughly the same as the OBR’s last forecast.
Interest rates must hit 6% to tame inflation, says former rate-setter
Willem Buiter, a founding member of the Monetary Policy Committee (MPC), has warned that the Bank of England will be forced to raise interest rates to 6% to tackle soaring inflation. Mr Buiter said policy will need to be "seriously restrictive" to bring inflation down to the Bank's 2% target, warning: “It won’t be pretty. There will be a recession.” He also criticised the pace of MPC action, saying: “The Bank was, and continues to be, too slow in responding to rising inflation.” Fellow founding committee member Charles Goodhart believes the Bank will stop raising short-term rates slightly above 4%, “but that will not be enough to bring inflation back to target, because the damage to output and unemployment will be felt to be too high." Dame DeAnne Julius, who was also on the MPC when it was established in 1997, commented: “My best guess is for the Bank rate to peak between 4% and 5% before coming down again, but this may take several years.”
Consumer confidence hits a new low
Consumer confidence has fallen to a record low, according to research from data provider GfK. The consumer confidence index for August dropped three points to -44 from -41 in July. Joe Staton, a director at GfK, said: "A sense of exasperation about the UK's economy is the biggest driver of these findings.” He added: “With headline after headline revealing record inflation eroding household buying power, the strain on the personal finances of many is alarming.”
OTHER
Lenders can push ESG reporting
City AM’s Peter Clayton looks at how, amid increased focus on ESG, firms disclose climate-related risks and opportunities, noting that while there is a reporting framework in place, the reporting rules are only mandatory for around 1,300 of the biggest businesses in the UK. With those having to file reports only required to calculate exposure to climate risk, not demonstrate results, he says “the onus to do better still very much remains the prerogative and responsibility of individual businesses.” Mr Clayton argues that lenders “have a significant amount of influence and should be using their unique position to push for greater outcomes,” saying they can structure the terms of loans to influence behaviour. He goes on to suggest that “implementing terms with any sort of accuracy and effectiveness requires detailed knowledge of the sectors in which lenders operate,” outlining a need to understand what constitutes best practice and “an ability to navigate the alphabet soup of accreditation systems.” Larger generalist and high street banks, he notes, “may not be well placed to truly understand good from bad.”