Rate rise threat for 3m home owners

Published 02nd Nov 2010

Almost three million homeowners would struggle to pay their mortgage if interest rates rose by just 2 percentage points, according to new industry figures seen by The Sunday Telegraph. This equates to more than one in three (37pc) of all mortgage holders.


Even if rates rose by less than 2 points, an estimated 1.6 million mortgages would be deemed "unaffordable", according to guidelines set out by the Financial Services Authority.

There are growing concerns that interest rates might rise sooner than previously predicted, given last week's better than expected growth figures. This would cause further misery for many struggling families, already facing rising taxes, higher-than-expected inflation and the prospect of widespread job losses, particularly in the public sector.

According to figures from the Council of Mortgage Lenders (CML), if mortgage rates rose by 2 percentage points from their current rate, about 2.9 million homeowners would have home loans that breached the regulator's affordability guidelines. The usual advice for those whose finances are this precarious is to take out a fixed-rate mortgage: it may cost more in the short term, but should safeguard their income against future rate shocks. However, a significant proportion of these borrowers are unable to afford or gain access to a fixed-rate deal.

Falling house prices and more stringent lending criteria have left tens of thousands of homeowners stuck on their current deal, unable to remortgage elsewhere. For those lucky enough to have a mortgage with C & G or Nationwide, for example, this may not be too bad: both have a standard variable rate (SVR) of just 2.5pc. But the average is significantly higher at 4.75pc, with some lenders, such as Kent Reliance Building Society, charging 6.08pc.

One of the main problems is that people don't have enough equity in their property to move. David Hollingworth of London & Country mortgage brokers said lenders offered their best rates only to customers who have at least 25pc equity in their home, and there are almost no deals available to those with less than 10pc equity.

According to the CML, nearly half a million mortgages for more than 90pc of the property value have been granted since the start of 2007. Given that house prices are still some way off their August 2007 peak, and are still falling, according to figures from Nationwide last week, it seems fair to assume that many of these homeowners will still have less than 10pc equity in their home. The weakened housing market will also have dragged some homeowners who had more than 10pc equity when they arranged their mortgage into this net.

It isn't just those with high-value loans who face difficulties. Figures published by the FSA last year indicated that a quarter of all new mortgages granted were on an interest-only basis; in addition, one in four mortgage customers borrowed more than three-and-a-half times their salary. This figure was even higher for first-time buyers, 38pc of whom took out a mortgage on this higher income multiple. In both cases, homeowners would struggle to remortgage on these terms.

In addition, the FSA reckons that 45pc of all mortgages – that's 5.4 million home loans – were granted without the lender verifying the customer's income.

Melanie Bien of Private Finance, another mortgage broker, said: "Unless these homeowners can now prove they have sufficient income to service this loan, they may well find themselves unable to remortgage onto better terms."

Remember, proving income is likely to mean finding at least six months of payroll slips, or for those who are self-employed up to three years' audited accounts. And bonus payments, a future inheritance or simply selling the house are unlikely to be accepted as repayment vehicles for interest-only loans.

Mr Hollingworth said: "There are thousands of people who are effectively stuck on their lender's standard variable rate (SVR). While interest rates remain low this may not be too much of a problem, as fixed-rate deals are priced at a premium." But he urged borrowers to "stress-test their finances" and not get lulled into a false sense of security by the benign interest-rate environment. "Interest rates will rise, the only question is when and by how much," he added.

Homeowners on lower SVRs have benefited from reduced monthly mortgage payments; they should use some of this money to help protect themselves against future rate rises, he said.

Although options may be more limited for these borrowers, there are steps they can take to mitigate against rising rates and keep the roof over their head.
1. TALK TO YOUR LENDER

While you may not qualify for the “best buys” advertised on price comparison websites and through mortgage brokers, it is worth talking to your lender about your options.

Mortgage providers such as Halifax and Nationwide Building Society offer a range of fixed and tracker deals for existing customers. While these will not be as keenly priced as the best deals on the open market, they could still provide peace of mind for those worried about rate rises. In some cases there will even be remortgage options for those who find themselves in negative equity.
2. REDUCE YOUR MORTGAGE

Some economists say it could be at least a year before rates rise. If they are correct, homeowners have time to improve their financial position.

If your lender permits it, increase your monthly mortgage payment by whatever you can afford (most will allow you to pay 10pc off the mortgage balance without penalty). Even a modest increase will chip away at the loan, potentially increasing your equity position, so you can take advantage of fixed or capped deals when rates rise.

Alternatively, build up your savings so that when rates do rise you have some spare funds to meet the higher monthly payments. In interest terms this may be less attractive (the interest charged on your mortgage is likely to be higher than what you get on any savings), but this may give people more flexibility, particularly if they are worried about job security.
3. SWITCH TO FIX

Even homeowners with substantial equity can find that longer fixed-rate deals are more expensive than the cheapest SVRs. Do you want to pay this premium given that rates may not rise for another year?

One option is a capped tracker. Coventry Building Society, for example, has a three-year deal charging 2.5 percentage points above Bank Rate (giving a current rate of 3pc). However, it is capped at 4.99pc, so homeowners can calculate what their maximum monthly payments would be.

Other options include “switch and fix” deals, offered by the likes of Woolwich, RBS and Nationwide. Homeowners remortgage onto a tracker deal but retain the right at any point to revert to a fixed deal. They will still pay the appropriate arrangement fee – and once rate rises look imminent, expect the cost of fixed-rate deals to rise accordingly.
4 CONSIDER INSURANCE

If you would struggle with higher interest rates but can’t remortgage, it is possible to buy insurance.

MarketGuard offers a two-year policy, called RateGuard, which offers homeowners the option of paying premiums on a monthly basis. It is aimed at the general market, with no credit or wealth checks.

There are other derivative-based products, sold by companies including John Charcol, that offer cover for longer periods, but these are aimed at wealthier professional buy-to-let investors, who have to meet certain income criteria.

The price of both depends on the size of your outstanding mortgage and, of course, the likelihood of interest rates rising. But once you have bought the insurance, the price remains fixed for the term of the policy. RateGuard prices start at £30 a month for a £100,000 mortgage. If rates do rise, homeowners pay the first full percentage point increase, but any rate rise beyond that is covered by their insurance policy.

A spokesman for MarketGuard said: “Like any insurance policy this is designed to provide peace of mind for homeowners worried about the financial consequences of possible interest rate rises.”

Mr Hollingworth said: “If homeowners don’t have the option of remortgaging and can’t significantly reduce their outstanding debt, they may want to consider one of these policies. 'To date they have mainly been used by high-net-worth borrowers with either a large home loan or more than one mortgage. Those with a few buy-to-let properties can be particularly exposed to interest rate rises.

“But the fact that people can pay monthly with some of these policies may make them more attractive to the mass market.”

Source: ' Telegraph '

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