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First Time Buyer

One in four homeowners will struggle when base rate rises

Joanna Faith
Written By:
Joanna Faith

Over 70% of homeowners are likely to see their mortgage payments go up if the Bank of England base rate increases, but a fifth have ‘no idea’ how the rate will affect them, figures from TSB show.

More worryingly, 26% of people surveyed would have ‘real difficulty’ keeping up with their mortgage payments if the monthly charge increased by as little as £99. Over half (56%) are already struggling with their monthly bills – with 4% behind on payments.

Tom Cleary, financial services manager at advice firm Start Mortgages, said: “I don’t think I’ve ever seen that fine of a line. I’d be very surprised and incredibly worried if people were £99 away from not being able to pay their mortgage. I’d like to think that mortgage affordability calculators, often stress tested at 7%, are building in more than that as a buffer.

“I’m not sure the British population is what you’d call a nation of savers. Most people tend to cut their cloth and live on a daily basis in terms of forward planning. Most people are no more than three steps away from potential financial problems.”

Small rise, big problems 

Even a small rise would have a significant impact on borrowers.

According to the TSB research, the typical outstanding mortgage is £113,439, meaning a homeowner paying the average lender Standard Variable Rate (SVR) of 4.48% pays £692 in mortgage repayments a month. If mortgage rates rose to 6%, the monthly cost of the loan would jump to £731, and at 7%, homeowners would need to find an extra £324 a month just to maintain their current borrowing.

Mark Carney, the governor of the Bank of England, has suggested an interest rate two percentage points higher than it is today could indeed become ‘the new normal’.

The average mortgage for a first-time buyer is much higher at £141,995. On a two-year fixed rate deal at 1.95%, the typical first-time buyer pays £598 a month. After the fixed term is up, their deal will revert to a typical SVR of 4.48%.

If rates increase to 6%, first-time buyers will pay £915 a month, or a staggering £1,004 at 7% interest – more than £400 extra a month.

As a result, borrowers have increasingly sought the certainty of a fixed-rate mortgage. The proportion of these products has increased from 28% to 44% over the past three and a half years, and nine out of 10 of the new residential mortgages taken out in 2014 were fixed.

According to TSB, borrowers with the option of making overpayments should do so in order to take full advantage of current low rates.

Cut back on spending 

The study also looked at how mortgage holders would react to a base rate rise. It found most would be willing to make big changes in how they spend their money. Three quarters (74%) would budget and make spending cutbacks – TV and entertainment subscriptions (44%), takeaway coffee and lunches (42%), nights out (40%) and presents (36%) being some of the top luxuries given the axe.

Some 33% would prioritise their debt repayments and pay the most important ones first, while 43% of mortgage holders would look to switch to a cheaper deal, 31% would ask their lender for solutions and 14% would ask for help from debt advice organisations.

Just over one in ten (12%) would ask friends and relatives for money, while 9% would check their social security entitlements.

Martin Stewart, managing director of London Money, said: “I don’t think anyone is prepared for a base rate increase – I think we’ve been in this situation for so long people have forgotten that the base rate moves. People borrow money and then forget about it.

“People are immune to how much debt they have. While they won’t necessarily be ready for a 0.5% increase, it’s something they will be able to accommodate. The major issue will come if the cost of borrowing increases by 1% in the next 12 to 18 months. No one is ready for that.”

Action you can take

If you are worried about meeting mortgage repayments in the event of a bank rate rise there are steps you can take to help you.

Understanding your current mortgage rates, and shopping around, could allow you to get a better deal – either with your existing provider or elsewhere. This also applies to overdrafts and credit cards, which are also affected by the Bank of England base rate.

Speaking to an independent debt professional, or your lender, can also prove invaluable if you are struggling to meet payments.

Ian Ramsden, director of mortgages at TSB, said: “The statistics included in TSB’s report are fairly shocking and clearly there’s a lot of work to be done to help Britain’s homeowners understand how they can accommodate a rate rise.  But there is no need to panic; a little bit of planning now can make a big difference in the future.”