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Cheap mortgages can't last forever, experts warn
Homeowners should consider how they would cope with monthly mortgage payments rising by a fifth when interest rates rise.
by Michelle McGagh on Jun 14, 2013 at 11:33
Many people would struggle if their mortgage repayments increased by a fifth but that is the prospect facing homeowners when interest rates start to rise.
A combination of a historically low interest rates (the Bank of England base rate has been stuck at 0.5% for four years) plus the government’s Funding for Lending scheme have pushed mortgage rates to record lows. Five-year fixed rates are now sitting at around 3% or less for those with a decent chunk of equity in their homes and are still under 4% for those borrowing 90% loan-to-value (LTV).
This is great news for now and is set to continue as the government's Help to Buy scheme also increases accessibility to cheap mortgages.
However, there is a mounting concern about what happens when homeowners are hit by a double whammy of the end to the Funding for Lending scheme in 2015 and the inevitable rise of interest rates.
The Council of Mortgage Lenders reckons that the average monthly mortgage payment is £678. James Ferguson, founder of research company MacroStrategy Partnership, has estimated that if interest rates rise to just 2% then the impact would increase payments by 22% for those on a tracker mortgage, adding £149 a month to the average mortgage bill. Those wanting to remortgage or move house will also be faced with higher bills for fixed mortgages.
Ferguson said the government’s reason for keeping interest rates low was to ‘make today easier than yesterday’ but that it was actually storing up a number of problems for the future.
Compounding the property problem
A substantial increase in mortgage outgoings would be a blow for homeowners who are already weighed down by an increasing housing debt burden.
There is a significant mismatch between house prices and wages. According to the latest Halifax house price index the average property was worth £166,898 at the end of May, an increase of 2.6% on last year, and up 1.5% compared with the previous three months.
Although it is being hailed as a recovery in the market a serious point is being overlooked; the fact that wages are not keeping up with household pressures.
Nationwide chief economist Robert Gardner said: ‘While inflation has fallen back in recent months, pressure on household budgets remains intense, as wages growth has also decelerated. Indeed, in real terms, average weekly wages have been falling for some time and are now back at the level prevailing in late 2003.’
So while house prices are edging up to 2007 highs in some parts of the UK, wages are still stuck in 2003. This means homebuyers are forced to shell out more of their wages to pay back loans on increasingly expensive properties.
When will homebuyers take a hit?
Mervyn King, outgoing Bank of England governor, has warned against increasing interest rates too soon. Nevertheless rates have to rise some time and the expectation that is the base rate will be rise by 0.75% to 1.25% by mid-2016.
Ray Boulger of mortgage broker John Charcol said new mortgage customers would be the worst hit by a rise in interest rates and subsequent mortgage rate increases.
‘Those that took their mortgages out prior to the credit crunch [when mortgage rates were higher] are paying lower rates now than what they started with so they should be able to withstand interest rates at 3% or 4% if their personal balance sheet is ok,’ he said.
‘However, for some people their personal balance sheet will have deteriorated through redundancy or their pay rise being lower than inflation. But the people who are most at risk are those who have taken out a mortgage more recently and have never had high interest rates before.’
Boulger said those who jumped on the property ladder recently ‘should be able to pay an increased rate but may have to adjust their lifestyle’. When lenders make mortgage affordability calculations they calculate whether a person can repay based on mortgage rates of 7.5%, rather than the rate they will receive, so an affordability buffer is already factored in.
Boulger said the biggest factor when interest rates start to rise is just how quickly they increase.
‘If they go slowly up to 4% or 5% it will be OK but if it is a rapid increase then it will cause problems,’ he said. ‘That has to be factored in as the government will not want to derail the recovery and see repossessions. If residential mortgages become a problem because of house price falls then that puts the balance sheets of the banks under pressure…there are lots of parts to this jigsaw that must be put together.’
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9 comments so far. Why not have your say?
Alan Tonks
Jun 14, 2013 at 18:32
Putting it quite simply they will not be able to cope, they will be crying all over the nanny for help.
Years ago when there wasn’t any help for people who genuinely couldn’t cope and they were turned out of their homes.
This was not surprising with mortgage rate of 15% and no nanny state, to prop them up.
So sorry, I cannot feel sympathy for people if the mortgage rate does rise, to a more sensible level.
report thisGraham D-C
Jun 15, 2013 at 06:51
No doubt interest rates will rise eventually, the effects of which mortgage holders could mitigate by paying off as much as possible in the intervening years; even if it means cutting out non essentials -holidays, etc. The most likely beneficiaries are long suffering savers who currently get a pitiful return on their money. WHEN interest rates rise, it will be interesting to see if house prices fall as the market stagnates
report thisphil101
Jun 15, 2013 at 08:13
Does anyone really think that a base rate rise will give savers better rates of interest? Of course not.
The banks will simply retain the bulk of the increased margin to ensure that they repair their balance sheets.
The government will let them do this as it wants the banking system to have greater capital reserves and sees low interest rates for savers as a soft taxation solution.
report thisGraham D-C
Jun 15, 2013 at 09:49
That will depend on how high interest rates eventually rise. If savers believe they wil not benefit they might vote Labour in the belief that interest rates will automaticaly jump. If Labour get in, the rise may start sooner than first thought. A rise in Premium Bond prizes wil be welcomed by many.
report thisDislexic Landlord
Jun 15, 2013 at 13:31
I dont know when Rates will rise but as the sun goes down it will rise ????
I belive this is the next major problem in the property world and when it comes there will be carnge a lot of mortgage borrows are following trackers and in my opinion its folly
I speak from experince a of 31 years I have seen rates of 15.4% and im not saying we will see rates this high again BUT IT COULD HAPPEN
10years ago you most could have never pridicted the Tax Payer would own Lloyds Bank ect would be in the sorry state there into day
For what its worth I only borrow money on Fixed rates If i can get 10 years fixed i Grab it
I fear FTB and home owners in genaral are not buying into Fixed rates
report thisJonathan
Jun 16, 2013 at 12:10
I can't see interest rates rising anytime soon. While the government has a huge deficit the only way it can afford to fund it without raising taxes and reducing spending is through QE to keep interest rate on its borrowings low and sell all its debt to itself. It's the only easy option, and I think the one that's going to remain is plenty more QE and hence low interest rates to come.
report thisDebt-free
Jun 17, 2013 at 11:04
When interest rates rise (and they will have to rise soon, as all economic indicators are pointing to recovery and inflation is already above target) it will be carnage. There are three reasons for this:
1. House prices are artificially high, partly as a result of low interest rates. That means many peoples' mortgages are massive relative to their earnings;
2. Most borrowers are either on trackers or discount rates, with few on fixes - so any base rate rise will feed through to a higher percentage of mortgage holders; and
3. An increasing percentage of homes will be held on buy-to-let mortgages over the next few years - that makes them MUCH more susceptible to repossession, as courts have no compunction about repossessing investment properties after a couple of missed payments.
House prices will go on rising for the next year or two.....but as soon as those rates start going up......POP!!
report thisJonathan
Jun 17, 2013 at 14:29
Debt-free
One of the reasons for getting interest rates so low with QE was to prevent a house price crash; that and maintaining a low interest rate on new government debt (the deficit) and creating an artificial customer to buy government debt.
Until the government sort out the deficit, which is is not a likely prospect anytime soon, interest rates will not rise and QE will carry on.
report thisDislexic Landlord
Jun 17, 2013 at 14:37
FAO Debt Free I think you assumption is 100% right
Most folks are not thinking as you and I are thinking
I would go as far to say all residential Mortgages should be fix for the full Term and accident a unemployment insurance made part of all Mortgage payment with no exemption
If we made the Insurance Tax deductable just think how much could be saved by HM govt when reposesed are put in rental homes
You would not buy a car on anything else than a fixed rate loan so why are you buying your home with such risks
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