715,000 at risk of immediate rise in mortgage payments

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Following an unexpected increase in inflation, which saw the rate rise from 10.1 percent to 10.4 percent in the year to February 2023, the Bank of England has increased its Base Rate to 4.25 percent. The change will have an immediate impact on some borrowers, particularly those with variable and tracker mortgages.

Announcing the Base Rate increase today, a statement from the Bank of England reads: “There have been large and volatile moves in global financial markets, in particular since the failure of Silicon Valley Bank and in the run-up to UBS’s purchase of Credit Suisse, and reflecting market concerns about the possible broader impact of these events.”

However, it noted: “The Financial Policy Committee (FPC) judges that the UK banking system maintains robust capital and strong liquidity positions, and is well placed to continue supporting the economy in a wide range of economic scenarios, including in a period of higher interest rates.”

As tracker mortgages generally base interest rates on the Bank of England Base Rate, those on these deals will see their payments increase.

Data from UK Finance in January 2023, the trade body for mortgage lenders, shows that roughly 715,000 households are currently on tracker mortgages.

With the Base Rate rising to 4.25 percent, research by TotallyMoney shows the average UK property costing £270,708 on a variable rate and with a 75 percent Loan To Value (LTV) will see monthly mortgage repayments increase by £26. Compared to December 2021, repayments could be £456 more each month.

For a £150,000 property, this would represent an additional £18 per month or a cumulative increase of £345 in monthly repayments.

For a 400,000 property, this would represent an additional £48 on people’s monthly repayments, or a cumulative increase of £919 since December 2021.

Concerns have also been raised that, as a result of the consecutive Bank of England Base Rate rises, 2023 will soon be an especially expensive year for those with fixed mortgage rates coming to an end.

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According to the Office for National Statistics, more than 1.4 million households in the UK are facing the prospect of interest rate rises when they renew their fixed rate mortgages in 2023. The report found that the majority of fixed rate mortgages in the UK (57 percent) coming up for renewal in 2023 were fixed at interest rates below two percent.

Coupled with a drop in real income, the FCA has estimated that 356,000 mortgage borrowers could face payment difficulties.

Alastair Douglas, CEO of TotallyMoney commented: “The Bank of England’s rampage on interest rates has pushed people’s finances to the limit, and an estimated 356,000 mortgage borrowers are expected to be facing repayment difficulties by the end of June next year.

“While it’s past its peak, inflation remains at sky-high levels. Four in ten households are spending less on food shopping and essentials, and they’ll be in for a fresh shock next month when suppliers hike water, council tax and telecom bills among others.”

However, Mr Douglas pointed out: “If you’re having difficulties keeping up with mortgage repayments, get in touch with your lender as soon as possible.

“They’ve been instructed to provide support — be it through offering lower repayments, switching to interest-only, or moving to a different rate — and they’ve already helped over two million customers.

“While contacting your lender won’t affect your credit score, missing payments can. It might make accessing credit more difficult for years to come while putting the best offers out of reach for loans, mobile phone contracts, and car insurance.

“By speaking to your lender at the earliest instant, you could also avoid slipping into mortgage arrears, which could put your house at risk of being repossessed.”

Adrian Anderson, director of property finance specialists, Anderson Harris, described the BoE’s decision as “no gain, just more pain”.

He said: “Mortgage holders hoping that the Bank of England would pause the interest rate rises were dealt a blow yesterday by the surprise leap in inflation to 10.4 percent in February 2023.

“Today’s rate rise to 4.25 percent is consistent with the Bank of England’s plan to battle inflation but it means no gain, just more pain for mortgage holders who are already squeezed.

“This will be particularly challenging for homeowners who have chosen to take a variable rate mortgage in the short-term, in the hope that inflation reduces and they can select a lower longer term fixed rate than what is available now.”

Analysing the current mortgage market, Rachel Springall, finance expert at Moneyfactscompare.co.uk, said: “A rise to Base Rate will come as disappointing news to borrowers who are not locked into a fixed rate mortgage, as their monthly repayments may rise in the coming months amid a cost of living crisis.”

However, she noted that borrowers who wish to refinance might be pleased to see that fixed rate mortgages have fallen since the tail end of 2022, and that it is currently cheaper on average to lock into a five-year fixed rate over a two-year fixed deal.

She said: “The incentive to fix is clear from the continued rise to the average Standard Variable Rate (SVR), which is now above seven percent, a level not breached since 2008. A rate rise of 0.25 percent on the current average SVR of 7.12 percent would add approximately £772 onto total repayments over two years (based on a £200,000 mortgage over a 25-year term).

“Affordability may well be the key challenge for borrowers struggling with the cost of living crisis, as interest rates are higher than prospective buyers, or those looking to remortgage, were perhaps anticipating.”

Whether now is the right time to get a mortgage will entirely depend on someone’s individual circumstances, so seeking advice is vital.

Ms Springall added: “In the meantime, it would be wise for borrowers to keep a close eye on the mortgage market, housing supply and house prices, particularly for new buyers who are a critical part of keeping the market moving.”

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