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Falling mortgage rates will not stop borrower ‘payment shock’

Nick Cheek
Written By:
Nick Cheek
Posted:
Updated:
30/03/2023

Homeowners coming off fixed mortgage rates will still experience a payment shock despite a reduction in pricing, according to a new report from ratings agency Fitch.

In its Mortgage Market Index for March, the credit ratings agency Fitch sai it expected mortgage interest rates to stay “broadly stable” for the rest of the year.  

It said borrowers would still benefit from lower rates, which now puts a five-year fixed mortgage at 75% loan to value (LTV) down from a 5.6% peak in October to 4.4% now. 

A 25-year term for a £100,000 mortgage represents a £70 monthly saving compared to October but for people refinancing off rates of around 2%, payments will increase.  

Fitch said the same representative mortgage could result in a 30% jump in monthly payments from £424 to £550. 

The firm said rates were still historically high and the reductions so far had been “modest”, leaving rates 3% higher than they were last year. 

High LTV borrowers less impacted 

Mortgages at higher LTV tiers have seen smaller increases due to lenders reducing margins.  

The average rate for a five-year fix at 95% LTV is now around 5.4%, having peaked at 6.2%. Higher LTV mortgages used to be around 1.5% higher than the equivalent at 75% LTV, but this has now narrowed to a 1% gap, Fitch said. 

It also noted that borrowers who were on a 95% LTV mortgage three or more years ago would be benefitting from a rise in house prices and therefore able to refinance at 75% LTV, which would further guard them from a payment shock. 

Potential for more arrears 

The firm predicted that around £220bn of residential mortgage debt would mature this year, a 40% increase on last year.  

It said many of these loans would be coming from 2021 when the market was fuelled by the stamp duty holiday. 

Fitch said this could cause “performance deterioration” which could result in a rise in owner-occupied mortgage arrears. It said arrears of three months of more could increase from 0.8% to 1 to 1.2%. 

It added: “We expect a deterioration in mortgage performance as high interest rates and inflation put household finances under pressure. While most households have the ability to absorb projected cost increases those at the lower end of the income scale, those with higher loan-to-income borrowing and those with variable rate debt are most vulnerable.  

“We expect a modest rise in foreclosures as lenders will be accommodating with forbearance provided borrowers can meet interest payments. Forbearance arrangements are likely to increase alongside arrears.”