Property and mortgages

Worries over effect of rate rise on home loans

A warning that millions of homeowners will struggle to keep up with mortgage repayments has been sounded amidst fears that many homeowners are not prepared for interest-rate rises.
A report states that one in five mortgage holders would “really struggle to find the extra money” if their monthly repayments rose, whilst more than a quarter don’t even know what their current rate is.
The study by the Money Advice Service found that more than half of those surveyed admitted to having no contingency plans should rates rise, and nearly half of all mortgage holders would struggle to find an extra £150 a month.
“Mortgage holders need to be more mindful of the fact that a rise in interest rates is widely predicted – even for those on a fixed rate, as their deals will come to an end sooner or later, said Nick Hill, of the Money Advice Service.
“Those who purchased their first property in the last five years will have only ever known historically-low interest rates, but less than 10 years ago the interest rate set by the Bank of England was 5% higher than today.
“The smallest increase in mortgage repayments can make a significant impact on a family budget – especially for those people who are already financially stretched. So it’s a good idea to review your personal finances, start looking at where you can cut back and plan ahead now.”
A rate rise of 2% on an mortgage balance of £150,000 being paid back over 20 years would signify a £158-a-month rise in repayments.
But the Council of Mortgage Lenders – the industry group representing lenders that make 95% of loans in the UK – said many people could take a few basic steps in preparation for rate rises, and most people would find the rises manageable, albeit unwelcome.
It added that although the Money Advice Service had looked at the effects of a rise in repayments of £150 a month, that sort of typical rise was not likely to be implemented for another few years. A short-term increase of a quarter-point rise in rates would add about £16 a month to an average mortgage repayment.
However, the CML agreed that it made sense to know exactly where you stand with your mortgage and make some basic budget calculations in advance of any rate rise.
“Although we don’t know when rates will rise, the monetary authorities have previously flagged that rises will be finely calibrated, so large sudden shocks are unlikely,” said the CML’s Sue Anderson.
“By planning ahead now, mortgage holders can get a clear picture of what a rate rise would mean for their own repayments.
“Taking steps in advance to work out what the effect on your payments might be, and planning ahead, will mean that most borrowers will be able to cope by careful budgeting.”