Mortgage alert for families on variable rates: Eight million could see payments rocket

Published 17th Dec 2010

Millions of households face mortgage misery in 2011 because they are vulnerable to higher interest rates, the Bank of England warns today.

Hard-pressed families could be hit by rapid rises in borrowing costs at a time when they are already struggling to make ends meet.

In its twice-yearly financial stability report, the Bank warns that growing numbers of homeowners are at risk because they have moved off fixed-rate mortgages.

Two-thirds of the country’s 12million outstanding mortgages – held by eight million borrowers – are now on floating deals.

This means they risk seeing their monthly repayments jump if there is any change in the Bank’s base rate – which is currently held at 0.5 per cent.

An increase in rates from 0.5 per cent to 1 per cent would push up the cost of the average £150,000 mortgage by £43 a month or £516 a year.

The Bank is worried because many months of rock-bottom rates have tempted millions of families to opt for a variable rate when their fixed rate expired.
But the Bank says today: ‘This exposes more households to the risk of increases in interest rates.’

Nearly a million people will be plunged into poverty as family incomes drop over the next four years, the country’s most influential economic think-tank said yesterday.

The income of the average home will drop in real terms because of the faltering economy and the Coalition’s tax rises and benefit reforms, it said.

About 900,000 people, including 300,000 children, will be plunged into deep poverty, living on incomes that will be below 60 per cent of today’s average earnings, according to the Institute for Fiscal Studies.

The poverty report, produced by the IFS and the Joseph Rowntree Foundation, said that between now and 2014 incomes would stagnate, with the effects also being felt by childless adults.

Julia Unwin, of the Foundation, said: ‘This research highlights the need and urgency for an anti-poverty strategy that protects and supports the most vulnerable.’

The report also warns there will be ‘further downward pressure’ on house prices, which are 14 per cent below their 2007 peak. Despite the grim outlook, fears are mounting that the Bank will be forced to put up rates in 2011 to bring inflation under control.

Combined with next month’s VAT increase from 17.5 per cent to 20 per cent, deep cuts to public spending, rising unemployment, and the soaring cost of everyday goods, household finances are facing an unprecedented squeeze.

‘A relatively small increase in interest rates could have a fairly sizeable impact on the housing market at a time when the market is already pretty weak,’ said Jonathan Loynes, chief economist at Capital Economics. The forecaster said house prices were 20 per cent overvalued and could fall by that amount in the next two to three years.

Among the worst hit by a rate hike would be those who stretched themselves to get on the housing ladder in the past two years.

The average tracker mortgage charges interest of 3.51 per cent while a typical two-year fix has a rate of 3.54 per cent.

Although this is seven times the Bank’s base rate, banks do not borrow the money they lend on to customers quite this cheaply. Typically they pay between 0.75 per cent and 1.5 per cent.

David Hollingworth, an expert at Bath-based mortgage broker London & County, said: ‘People got complacent and started to feel that it was normal for rates to be so low. All that can happen is that interest rates will increase.’

Source: ' ThisIsMoney '

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