U.K. mortgage rates have skyrocketed since Finance Minister Kwasi Kwarteng's mini-budget on Sept. 23, prompting banks to pull mortgage products threatening a deepen an expected housing market downturn.U.K. mortgage rates have skyrocketed since Finance Minister Kwasi Kwarteng’s mini-budget on Sept. 23, prompting banks to pull mortgage products threatening a deepen an expected housing market downturn.

There are growing fears of a housing market crash in the U.K., after a swathe of tax cuts announced by the government.

The mini-budget caused a huge spike in government bond yields after it was announced. Mortgage providers use these to price their loans.

The Bank of England bought long-dated bonds in response to the market turmoil. Andrew Goodwin, Oxford Economics Chief U.K. economist, said that there could be more pain in the future.

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"Though the BoE's temporary bond buying programme triggered falls in swap rates, they remain high, and a number of banks have already responded by increasing interest rates on their mortgage products."

It is looking increasingly likely that house prices will crash.

According to Oxford Economics, if interest rates remain at their current levels, house prices are likely to be 30% overvalued.

It's hard to see how a sharp drop in transactions and a marked correction in prices can be avoided with the high prevalence of fixed rates deals.

Kallum Pickering, senior economist at Berenberg, said that the housing market had begun a downturn due to rising borrowing costs and a hit to real incomes.

Banks have started to pull mortgage deals in a rush following the panic selling in the gilt market and the fear that the BoE could raise the bank rate to 6.0% by early next year.

Many banks have returned to the market with higher rates after suspending mortgage deals for new clients.

Some banks have increased the rate offers on their five year fixed 75% loan-to- value mortgage to between 5% and 5.5%. That is close to the August average for comparable mortgage loans.

The trajectory of interest rates expectations will affect whether the fixed rates on mortgage remain elevated or moderate.

Analysts don't expect the government's decision to scrap the top rate of income tax to calm the market.

Since the beginning of the year, the Bank of England has raised interest rates six times. Markets are pricing in a rate of over 5% for most of the next ten years.

Many households are used to low interest rates.

Maria Rivas said that given the combination of expected further interest rate rises and a slowing economy, banks will likely remain cautious.

The nature of the U.K. market means that the challenges may become evident sooner than later.

The hike to average mortgage rates is expected to be close to 2 percentage points. There are no serious financial stability risks to the U.K. given that British banks are well-capitalized.

He said that higher mortgage rates will amplify the housing downturn in the near term and drag on the recovery thereafter as households continue to pay a higher interest burden.