The Remortgage Wave Is Still Coming — Why the City’s Calm Looks Wrong

In the City, the UK mortgage reset is treated as old news. Households have rolled off cheap fixes, the Bank of England has cut rates, the banks have provisioned, and the consumer has apparently held up. The consensus is that the pain is known, priced and largely behind us. That confidence is exactly the thing to interrogate.

Mortgage markets are not a cliff. They are a conveyor belt. Millions of UK households fixed their borrowing in 2021 and early 2022 at rates near 2%. Those deals have been maturing through 2026 and will keep maturing into 2027. They are repricing into a world where a typical new five-year fix sits somewhere around 4.5% to 5%. The average is not the story. The distribution is.

The arithmetic is simple and ugly

Take a £250,000 repayment mortgage. Moving from a 2% fix to a 4.75% fix adds roughly £350 to £400 a month, depending on the remaining term. On a £400,000 mortgage, the extra can be £550 or more. For households already squeezed by food prices, energy bills and childcare, that is not a rounding error. It is a permanent budget shock.

People absorb it in predictable ways. They save less. They spend less. They use credit. They raid cash buffers. They delay big purchases. Some remortgage over a longer term to soften the monthly hit, which lowers payments but raises total interest. None of this shows up immediately in aggregate consumer data. The aggregate can look fine because older households with no mortgage are fine, while younger leveraged households quietly cut back.

Why markets may be misreading the second-round effects

The first-round effects are well flagged. Housebuilders have warned. Retailers have moaned. Banks have set aside provisions. The market has heard all that. The second-round effects are slower and less visible. Reduced household spending hits domestic services, small businesses and local economies. Arrears rise with a lag. Banks tighten credit. Hiring slows. That feeds back into consumer confidence and spending.

Bank earnings deserve particular scrutiny. The market has spent years rewarding banks for higher net interest margins. But the mortgage reset cuts both ways. Banks are repricing old mortgages upward, yes, but they are also competing harder for deposits, facing higher funding costs and watching impairment charges creep. If unemployment rises even modestly, provisions will follow. The market may be treating bank earnings as more normalised than they are.

Then there is the FTSE question. The FTSE 100 is a global index listed in London. It earns much of its money overseas. The FTSE 250 is far more exposed to the UK domestic economy. If the mortgage reset grinds down domestic demand, the FTSE 250 is where the earnings downgrades will show up. The consensus has been happy to buy the UK domestically exposed trade on the grounds that rates are falling. Falling rates do not magically undo a 2% to 4.75% repricing.

The Bank of England’s awkward position

The Bank is stuck between sticky inflation and a slowing economy. CPI is still near 3%, services inflation is not fully tamed and wage growth is cooling but not collapsing. Bank Rate around 3.5% leaves room for modest cuts, not a rescue mission. If the labour market cracks, the Bank can cut faster. But even a series of 25 basis point cuts will not neutralise a mortgage payment shock of the size now working through the system.

That is the bit the headlines miss. A headline saying mortgage rates have fallen from their peak sounds reassuring. But a 4.5% rate is still more than double the 2% fix it is replacing. The reset is not about the direction of rates from here. It is about the level relative to what households were paying before.

What the headlines will not tell you

Watch the lagging indicators, not the press releases. Mortgage approvals lead completions. Remortgage completions lead arrears. Arrears lead bank provisions. Consumer credit growth tells you whether households are borrowing to maintain spending. The Bank of England’s Credit Conditions Survey tells you whether lenders are pulling back. UK card spending data tells you whether the consumer is cracking. And the relative performance of the FTSE 250 against the FTSE 100 tells you whether the market is starting to price domestic weakness.

Also watch the rental market. Landlords rolling off cheap buy-to-let fixes face the same arithmetic. Some will sell. Some will pass costs on. Either way, it feeds into housing supply and consumer inflation.

The contrarian stance

The contrarian trade is not to short UK plc or declare imminent catastrophe. It is to resist the consensus that everything is priced. Domestic cyclical stocks may look cheap, but cheap can get cheaper when earnings estimates fall. Banks may look well provisioned, but provisions are based on unemployment assumptions that could prove too optimistic. The time to get interested in UK domestic assets is not when the first-round pain is obvious. It is when the second-round pain is visible and the market has finally marked earnings down.

For now, the macro story is a grind, not a cliff. Markets are good at pricing cliffs. They are less good at pricing slow, cumulative pressure on household budgets. That is why the City’s calm looks wrong. The remortgage wave is still coming. It just does not announce itself with a headline.