Borrowers will be able to afford an interest rate rise
Would you struggle to pay your mortgage if interest rates were to rise? If so, new research suggests that you are in the minority, as most borrowers are well-placed to withstand a rise in the cost of their mortgage.
With the Bank of England widely expected to hike the base rate in the coming months, millions of borrowers could see their repayment rise.
Most borrowers will be able to afford a rate hike
New research from UK Finance – a new trade body that incorporates the Council of Mortgage Lenders – has suggested that most borrowers will be able to take a base rate increase in their stride.
With many experts expecting the Bank of England to raise rates from their current level of 0.25% in the next few months, millions of homeowners are set to see their repayment rise. However, the research has found that borrowers will be able to continue to pay their home loans.
One of the reasons is that more than half of all outstanding regulated loans are on a fixed rate, meaning they won’t change even if the base rate were to rise.
And, even though around two million regulated mortgage borrowers will come to the end of their fixed rate in 2017 or 2018, many could remortgage onto new low-rate deals, particularly as around half of the fixed-rate mortgages due to expire and move to a reversion rate by the end of 2018 are at 60% loan-to-value (LTV) or lower.
The research found that borrowers on standard variable rates (SVRs) – 3.9million borrowers, according to UK Finance’s Regulated Market Survey – typically have lower debt levels, as the loans were taken out when house prices were lower.
The 1.4million borrowers currently on tracker rate deals have higher average mortgage balances, but the average interest rate on these products – 1.73% – is considerably below typical rates for any other rate type.
This means that tracker rate borrowers tend to have lower repayment rates. FT Adviser reports that average monthly payments are currently £525 for an SVR customer, £566 for a borrower on a tracker rate and £741 for borrowers on fixed rates.
Expert warns that “things would be made uncomfortable”
UK Finance described the figures as ‘encouraging’ but some experts have warned that a rise in interest rates could have more serious consequences.
Mortgage expert Martin Stewart says the country was ill-prepared for a rise in interest rates and warned that people are living “very close to the wire”.
“The level of savings in the UK is derisory,” he comments. “We have seen many bank statements and very few that have wriggle room at the end of the month. Most people have borrowed up to the max, with no obvious thought about what may happen in future.
“We saw one person who spent £100 a month in a coffee chain. That is a massive canary down the coalmine. A base rate increase of 0.25% is not going to scare anybody, but if at some point borrowing had to revert to the longer-term trend of where rates should be, things would be made uncomfortable.”