Aurelia Butler

Steps by banks and building societies to help UK borrowers cut their monthly mortgage payments risk storing up financial trouble later in their lives, as they face a higher total interest bill and lower income in retirement, financial advisers warned. Following the surprise announcement by the Bank of England that it was raising interest rates by half a point to 5 per cent, borrowers were hit by another wave of mortgage rate rises last week, leaving households coming off a fixed-rate deals in the months ahead facing a “mortgage shock”.Big lenders, including Barclays, Halifax, HSBC, Nationwide, NatWest, Santander, TSB and Virgin Money pushed up the cost of their products. Santander raised rates twice in a week.The surge in mortgage costs has piled pressure on the government. An owner of an average priced property with a 25 per cent deposit, who is refinancing a two-year fixed-rate deal, would have to pay an extra £580 a month on a new fix, according to consultants Oxford Economics.In the wake of the BoE’s decision, chancellor Jeremy Hunt brokered a deal with the UK’s biggest lenders for a “mortgage charter” designed to give struggling borrowers options for slimming — at least temporarily — their monthly mortgage payments as their budgets groan under the weight of higher bills. Measures include the option of switching from a capital repayment mortgage to an interest-only loan; or extending the term of their mortgage, which spreads repayments out over a longer period. In either case, borrowers can ask for six months under the new arrangement with no effect on their credit score. After that, if they wish to prolong it, they must take an affordability test with the lender. 

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The initiative could provide a lifeline for those on the cusp of affordability. But property analysts and financial advisers fear that those who choose not to switch back risk damaging their finances in the long term. Extending a mortgage terms beyond the historical norm of 25 years is a long-running trend, particularly among first-time buyers. Stretched by affordability tests and high house prices, they have been increasingly signing up to “marathon mortgages” as long as 40 years.The proportion of first time buyers taking out mortgages of at least 35 years more than doubled over the 12 months to March to 19 per cent, according to the latest data from UK Finance. There was a similar trend among those moving house with the proportion of loans of between 30 to 35 years rising from a fifth to a quarter.For many it can be the only way to get on or move up the housing ladder. One consequence, however, is a bigger total interest bill over the life of the mortgage.Extending a £200,000 mortgage from 25 to 35 years would cost almost £39,000 more in interest, assuming 3 per cent interest over the life of the loan. At £400,000, that 10-year extension means an extra £77,500, according to investment broker AJ Bell. “Before households leap to take advantage of the new flexibility they need to really consider the long-term impact,” said Laura Suter, AJ Bell personal finance analyst. Moreover, the relief provided may not be as great as borrowers hope, warned Adrian Anderson, director at mortgage broker Anderson Harris. “If you’re coming off a rate of 2 or 3 per cent to a current rate of 5 or 6 per cent, even if you move to an interest-only mortgage the problem is you’re still paying far higher monthly payments than you were before. It may not be enough of a saving for a lot of people.”Financial planners also fear the mortgage crisis will seriously affect pension saving. Officials figures from March found 38 per cent of working-age people were not saving enough even before higher housing costs to provide them with an adequate income in retirement relative to their pre-retirement earnings. The figure rises to 55 per cent for higher earners. Signing up to a mortgage term that extends into retirement compounds this problem, said Gail Izat, managing director for workplace at Standard Life. “I absolutely understand why easing the short term burden by adding to the mortgage term makes sense. But it does exacerbate that savings gap and we need to think about how we can mitigate that.”Gary Smith, partner in financial planning at wealth manager Evelyn Partners, fears “quite a lot” of borrowers will fund pricier mortgages by either reducing pension contributions or from savings that were intended for the medium to long term “with inflation negating wage rises and stealth income tax rises in operation.”Reducing or pausing pension contributions will mean missing out on employer contributions and government tax relief. And without a feasible plan to get their savings back on track, they may need to work longer to achieve the quality of life they had planned in retirement. Some may also be tempted to solve their mortgage problems by tapping into the 25 per cent tax-free lump sum from their pension pot when they reach 55 (rising to 57 from 2028). “This is by no means an unusual strategy but it obviously leaves less savings to provide a retirement income and the mortgage crunch could mean it is employed by savers with less of a pot to work with,” Smith said.With little certainty over when inflation might cool and allow interest rates to drop back, raised housing costs are “bound” to have a disruptive effect on saving, he warned, particularly if higher inflation proves more stubborn than expected. The government said the best way to help households was to drive down inflation but it had offered “significant” cost of living support and put the mortgage charter in place to ensure “borrowers and savers are protected from rising costs.”It added: “We always want to encourage pension saving and with automatic enrolment an extra £33bn was saved in 2021 compared to 2012.” More

Property consultant CoreLogic figures showed national home prices were up 1.1% in June from the previous month, after bottoming in February and starting a sustained rise.Australia’s households are among the most indebted in the world, while housing affordability has recently plumbed all-time lows.The Reserve Bank of Australia is set to raise its key interest rate by 25 basis points to 4.35% on Tuesday to curb stubbornly high inflation, although a Reuters poll of economists suggested the decision would be a close call.Every state and territory capital except Tasmania’s Hobart recorded higher prices for dwellings, according to CoreLogic. Sydney, Australia’s biggest city and capital of New South Wales, led the way with a 1.7% surge. Brisbane, the capital of Queensland, followed at 1.3%.CoreLogic’s Tim Lawless said a lack of supply was still the main driver of price rises, adding that “the flow of new capital city listings was nearly 10% below the previous five-year average” in June.While values continued to record “broad-based upswing”, the pace of growth in most capitals slowed, according to CoreLogic.”A slowdown in the pace of capital gains could be a reflection of a change in sentiment as interest rate expectations revise higher,” Lawless said. “Higher interest rates and lower sentiment will likely weigh on the number of active home buyers, helping to rebalance the disconnect between demand and supply.” More

From personal affairs to corporate life, freedom of action requires economic robustness. The same applies to countries: strong growth and productivity are a necessary, if not sufficient, condition for effective self-determination.It is good, then, that this realisation features prominently in the new economic security strategy proposed by the European Commission. It names “promoting our own competitiveness [and] deepening the single market” as the first priority for economic security. It could be just the principle around which to reconcile the conflicting preferences of political and corporate Europe.The commission acknowledges that an effective economic security strategy must enjoy buy-in from the corporate sector as well as consensus among member states. Neither exists at the moment. China looms unnamed behind each of the economic security risks Brussels identifies. That puts the commission’s proposed remedies at cross-purposes with the commercial strategies of many European companies and their political backers.For them, the danger is not so much dependence as the fear of missing out (on China’s growth) and losing out (to both Chinese and US rivals in global markets). From this perspective, you “derisk” economic entanglements with China at the cost of adding risks to company competitiveness. This contradiction will not be resolved — and policy will remain confused and indecisive as a result — without learning the right lessons from the Chinese and US achievements that make Europeans nervous.While corporate Europe obsesses about export markets, the recent successes of others flow from prioritising demand at home. The power of US president Joe Biden’s Inflation Reduction Act comes not from discriminating against imports, but from its success in making everyone expect an imminent, huge and profitable market for green technologies in the US, in which they would like to have a share.As the US Treasury has documented, the boom in American factory-building since the passage of Biden’s main industrial policy acts is unprecedented and unrivalled. This massive construction wave surely did not hinge solely on World Trade Organization-incompatible subsidies. Such a big market would always require a large scale-up of local supply.As for China, its growth strategy has of course long been export-led, using cost-efficient scale to compete on price in global markets and gradually moving up the value chain. But even before Beijing formalised a doctrine of “dual circulation”, the regime had begun to use the domestic market as a growth motor for important sectors such as electric vehicles, where Chinese carmakers are at the technological frontier and sales leaders at home. Consider also how Europe lost its lead in photovoltaic manufacturing in the 2000s. The first phase of that process fits the conventional narrative. Consumer subsidies accelerated PV installations in Europe, but China outbid Europe’s manufacturers. Less attention is paid to the second phase. As EU governments cut subsidies and imposed tariffs on Chinese PV imports, Europe’s solar power growth flatlined. China picked up the slack, overtaking Europe in solar PV installations around 2013. By 2020, it had 253 gigawatts of solar energy capacity installed, more than 50 per cent above Europe’s level.At the time, the diagnosis was oversupply. In hindsight, it was about insufficient demand. Had Europe boosted its PV installation rate rather than let it fall, it would have helped Chinese exporters, true. But it would also have created a market big enough for European producers to succeed again, just like Beijing did for Chinese ones.Today, Europe risks repeating that mistake in other green tech. Pleas to weaken green regulations, from the future ban on combustion engines to tightening rules of origin on batteries, only serve to shrink the expected size of the domestic markets for green-tech goods and services. Their supply capacity would naturally slow in response.The EU has actually been very good at creating such markets — that is why it remains an export leader in many green tech industries. So it should not forget that its actively market-shaping regulation is the root of this success. Nor that the scale of its domestic markets boosts its influence on market-shaping and standard-setting abroad, as the commission’s strategy notes.Doubling down on boosting domestic green tech demand is Europe’s route to economic security. Companies confident enough that they can profit from investing in their home markets’ growth are less likely to resist the “derisking” that will reduce Europe’s dependency on political choices elsewhere. Politically, economic security starts at [email protected] More

Is the US labour market cooling? US hiring is expected to have slowed in June after two months of unexpected rises that have helped make the case for the Federal Reserve to continue raising interest rates this year. The Labor Department is forecast to report on Friday that the US added 200,000 jobs in June, according to economists polled by Bloomberg, down from the 339,000 added in May. The unemployment rate is expected to be 3.6 per cent, down from the current rate of 3.7 per cent. Average hourly earnings growth is expected to be stable at 0.3 per cent month over month. The US jobs market has been much more resilient this year than economists and analysts expected, running at pre-pandemic levels even as the Fed has raised interest rates at a blistering pace over the past 15 months. The median estimate from the Bloomberg survey of economists has underestimated the headline jobs figure every month for the past 14 months. The unemployment figure has, however, slowly begun to rise.June’s jobs data will be a crucial part of the Fed’s deliberations when it meets for its next policymaking session in July. The Fed indicated at its June meeting that it was prepared to raise interest rates twice more this year, with an increase coming as soon as July. Investors in the futures market are currently placing an 84 per cent chance on the Fed delivering that quarter-point increase. Kate DuguidCan the eurozone economy return to growth?The eurozone economy has contracted slightly for the past two quarters and next week will provide more clues on whether it is showing signs of emerging from this rut.High inflation and rising borrowing costs have eroded the purchasing power of many European households over the past year, but there are signs that rising wages and falling energy prices have given consumers a boost recently.This led to a month-on-month rise in retail sales in France, Spain and Germany in May, pointing to a strong probability that the overall eurozone figure will return to growth for the first time since January when that data is released on Friday.There could also be more encouraging news for Germany’s struggling manufacturing sector this week. Thursday’s industrial orders data is expected to show a partial rebound with 3 per cent monthly growth in May and output figures on Friday are expected to be up 1 per cent.However, surveys of businesses and households are pointing to a fresh downturn of activity and demand in June. Jörg Krämer, chief economist at German lender Commerzbank, is sceptical about the chances of a sustained rebound, predicting “the German and euro area economies will contract again in the second half of the year”. Martin ArnoldWhere is China’s economy heading?After a run of downbeat data in China, investors will be looking to next week’s releases on manufacturing and services for clues about the health of the world’s second-largest economy.The Caixin Manufacturing purchasing managers’ index, due to be released on Monday, is expected to come in at exactly 50 according to a Bloomberg poll of economists, straddling the PMI threshold between expansion and contraction.Meanwhile, the Caixin Services PMI on Wednesday is expected to show a reading of 56.2, down from 57.1 in May, another Bloomberg poll showed.Expectations for zero growth in manufacturing in June follow on from this week’s official manufacturing reading, which came in at 49 and signalled a third straight month of contraction among the large and largely state-run manufacturers covered by the government survey. Monday’s reading will reflect conditions among the smaller and private factories employing most of the sector’s workers.“Apart from a shortlived bounce in the manufacturing sector after the zero-Covid measures were shelved in early December 2022, China’s manufacturing has been limping along,” said Robert Carnell, head of Asia-Pacific Research at ING.Carnell said the most recent underperformance from the official manufacturing PMI “was not much of a surprise” and that the slowdown in non-manufacturing activity reported on Friday confirmed that much of the growth in services this year has been driven by a “pent-up demand” from consumers previously constrained by China’s zero-Covid policies.But he warned that “there is only so long that this can go on.” Hudson Lockett More