Financial experts are warning that the cost of mortgages in the UK could rise by as much as £1,000 by this time next year. As interest rates rise and lending criteria become tougher, existing mortgage payers could be subjected to a spike in their repayment rates equal to almost £110 per month on average.
Since the economic crash, interest rates have been at an all-time low of 0.5 per cent. As we begin to come out of recession, predictions are that this rate will start to increase. Expectations are that rises will be in the order of 0.25 of a percent, until a target of 1.5 per cent is reached around this time next year.
The Bank of England has said that any rate rise will be gradual, but has already indicated that there will be an increase by the end of 2014. Their latest Inflation Report suggests that the market anticipates rates to be at least 1.2 per cent by the end of 2015, although it is likely that this figure will be increased again when their next Inflation Report is published.
What does this mean for borrowers?
The impact of any interest rate rise will depend largely on the size and type of mortgage the householder has. An interest only mortgage at the average of £131,000 over 25 years will see an increase in costs o over £1,300 per annum. This will equate to additional payments of around £110 every month.
Those on a capital repayment mortgage of a similar size and length would be looking at an annual increase of £872. This could take repayments from a comfortable 17 or 18 per cent of the householder’s income to over 20 per cent.
This is based on a rise to a base rate of just 1.5 per cent.
However, should rates rise faster, for example to 2 per cent, then the average repayments mortgage could rise by £1,790 a year. This sort of rise would take repayment to income ratios dangerously close to those we saw at the end of 2007, just before the housing market crashed.
And for house buyers?
The best advice at this stage is to secure your property and mortgage at a price you are more than comfortable with. Repayments should be no more than about 15 per cent of your household income, leaving some room for manoeuvre if interest rates do rise.
For those in the buy to let business, predictions are that more properties will become available if the interest rate does inflate, as young buyers are squeezed out of the property market. High repayments coupled with tough lending criteria could see more householders opting to rent longer and buy later. This could be good news for the rental business, but the jury is still out as to how this will affect UK PLC.