Rising rates could mean mortgage misery for millions, as Hannah Davies discovers

There was an old woman who lived in a shoe. Her monthly mortgage payments stretched her finances to the limit, and she watched helplessly as they increased along with interest rates. She fell into arrears and the shoe was repossessed.

Some media reaction to the latest Bank of England Base Rate rise implies that this could become a common scenario in the UK, with millions of homeowners facing an uncertain financial future.

The latest hike was the fifth since August 2006, which translates to a total increase of 1.25% in less than 12 months. And some analysts predict that there will be at least one further rise within the next year.

Paul Smith, chief executive of haart estate agents, took a pessimistic view: “Rate rises in January and May have already taken effect and repossessions and remortgaging are on the increase as homebuyers struggle to meet mortgage repayments.”

Citizens Advice reports increasing enquiries from people struggling to meet their mortgage payments even before the latest hike. For first-time buyers, the property ladder probably seems even more unattainable.

The first borrowers to feel the effects of the increase will be those with tracker mortgages, as these are directly linked to the Bank Base Rate. According to figures from one analyst, this will mean a monthly increase of £30.04 on a £200,000 repayment mortgage.

However, those on fixed rate deals will not necessarily escape unscathed. The Council of Mortgage Lenders estimates that more than two million people will face increases of between 0.75% and 1.5% when their fixed rate terms come to an end over the next 18 months, causing real repayment difficulties in some cases.

This does not mean that first-time buyers have to give up their property dreams. Fionnuala Earley, chief economist at Nationwide, said: “If you are a first-time buyer, make sure that you have enough leeway in your finances to take into account future interest rate rises.

“The last thing you want is to become a mortgage slave.”

And now is a good time to start saving for the deposit, with some banks and building societies set to increase the interest rates on their current accounts by the full 0.25%.