Mortgage blog: Why you face a £1,000 rise in your home loan payments next year
Mortgages are set to become less affordable over the next year as interest rates rise and lending conditions tighten. That's the conclusion of new research from leading property agents Savills who say that homeowners could face an increase of more than £1,000 in their mortgage repayments in 2015.
An interest rate rise will not only affect millions of borrowers with a variable rate mortgage but will also make it more difficult for new buyers to access the home loan that they need.
Recent comments from the Governor of the Bank of England have suggested that interest rates in the UK will rise in late 2014 or early 2015. The base rate has remained at its record low of 0.5% since March 2009 but is set to increase now the economy is beginning to recover.
According to new data from Savills, an increase in the base rate of 1% - from 0.5% to 1.5% - would add £1,312 to the annual burden for a household on an average interest only mortgage of £131,215 payable over 25 years. This equates to nearly £110 a month. If you have a repayment mortgage then the annual increase would be £872.
The Bank of England has said that any increase in the base rate would be gradual and expectations are for quarter point increases. The Bank's latest Inflation Report indicates markets see rates at around 1.2% by the end of 2015, equivalent to around three separate quarter-point rate rises.
Savills say that increasing interest rates coupled with tougher lending criteria introduced in April and the discontinuation of interest-only loans will put mortgages out of reach for many who were considering buying.
The study also found that if interest rates were to increase by 2% it will take the repayment-to-income ratio to levels reminiscent of the third quarter of 2007, just weeks before the housing market crash. At 2% an average repayment mortgage will rise by £1,790 a year.
"This combination of factors will limit people getting into the market as mortgage repayments become less affordable. People will rent for longer and buy later as the economy improves," said Lucian Cook, head of residential sales for Savills. "This means that price growth will have to track earnings growth."
Keith Osborne, editor of Whathouse.co.uk, says: "The new mortgage rules introduced in April have already made it tougher for new buyers to get the mortgage than they need. When interest rates rise it will make it even harder for applicants to demonstrate that the mortgage will be affordable to them in the short and medium term."
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