Two-thirds of the potential £12billion rise in UK mortgage costs due to rising interest rates has yet to be passed on to borrowers, leaving them facing painful refinancing over the past few years. next few months, a think tank has warned.
The Bank of England this week lifted its main interest rate by a quarter of a percentage point to 4.5%, the 12th straight rise since December 2021. The increase will lead to higher bills for those on floating mortgage rates and heighten remortgage fears among those nearing retirement. end of a fixed rate agreement.
In a report released on Saturday, the Resolution Foundation said about half of the 7.5 million mortgage households facing interest rate resets between the fourth quarter of 2021 and the end of 2026 had yet to see a change in their mortgage rate.
The think tank estimated the £12billion increase in mortgage costs over the same period by taking market expectations of interest rate changes over the next four years, as well as the increase repayments since 2021, and calculating the impact on variable rate and fixed rate mortgages. .
He revealed that £9billion of the increase would be borne by the wealthiest 40% of households, who are more likely to live in expensive homes and hold mortgages. But he also warned that low-income households and first-time buyers would feel greater pressure on their standard of living, as mortgage costs are much higher in proportion to their income.
Simon Pittaway, senior economist at the Resolution Foundation, said: “People switching to new fixed rate offerings over the next year can expect to see their annual mortgage costs rise by £2,300 – with young low and low income families and individuals. middle-income households with mortgages face the biggest hits to living standards.
The BoE has estimated that around 1.3 million households will need to relocate between April and December 2023.
“For the average mortgagor within this group, monthly interest payments will increase by around £200 per month if their mortgage rate increases by 300 basis points – the increase implied by quoted mortgage rates,” said the central bank in its last monetary policy report.
Borrowers who like the certainty of knowing their future monthly payments can choose a two-year solution or a cheaper five-year offer, the brokers said. But consumers who think interest rates will fall over the next two years may reject a solution in favor of a follow-on mortgage, linked to the BoE’s base rate, which allows them to fix later if better deals emerge.
Simon Gammon, managing partner at brokerage Knight Frank Finance, said it was “a very personal decision” as it comes “with the risk that your monthly payments will increase if the BoE chooses to increase the rates further. interest rate”.
For the 8% of borrowers on tracker mortgages, Thursday’s interest rate hike means an average £24 increase in monthly payments, but a monthly jump of £417 when hikes from 2021 are included, according to data from industry body UK Finance, based on average mortgage size.
Meanwhile, the 9% of standard variable rate borrowers – the most expensive offered by lenders – will see an average increase of £15 in their monthly payments, but a monthly increase of £267 with previous rate increases included.
Mortgage brokers have played down the prospect of borrowers being forced into SVRs, pointing to the rise of product transfer mortgages, where a lender offers a new offer when the customer’s solution expires without having to reassess financial accessibility.
Ray Boulger, an analyst at brokerage John Charcol, said that even though people’s circumstances have changed, “they can still get a product transfer in almost any case. . . So if people are on SVR it’s normally by choice or probably by inertia.
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