The Telegraph reports today that in its Financial Stability Report, the Bank of England says that two thirds of borrowers are now on floating interest rate deals and the proportion is rising.
If rates go up next year, as some analysts suggest they will to combat rising levels of inflation, these home owners will see an increase in their monthly mortgage payments.
More could find themselves unable to afford their repayments, the Bank’s report warns.
Often, people automatically end up on their lender’s standard variable rate once the term of their initial fixed-rate deal has expired and they are unable to find an alternative affordable loan elsewhere.
There are also some home owners who have made the decision to stay on their lender’s standard variable rate as it is cheaper than remortgaging or because they are unable to remortgage due to tough lending criteria imposed by banks.
Many risk becoming so-called “mortgage prisoners” – trapped in their homes, unable to move, because of the cost of borrowing.
At the height of the credit crisis in 2007, there were 11.4 million outstanding mortgages, according to the Council of Mortgage Lenders. Less than half of these – approximately five million – were on a floating rate, such as a tracker mortgage or a lender’s SVR.
Almost seven million borrowers – or 57 per cent – had a fixed rate deal. But many of these initial deals are coming to an end.
In its report today, the Bank warns that around two thirds of outstanding mortgages – equivalent to 7.2 million – are now variable rate deals.
“Currently, around two thirds of outstanding mortgages in the United Kingdom have floating interest rates, somewhat above the average over the past five years,” the Bank says. “That proportion is rising as mortgagors move on to standard variable rate products as existing fixed-rate deals expire. This exposes more households to the risk of increases in interest rates.”
The Bank goes on to warn that a rise in rates could result in more home owners being unable to afford to repay their loans.
It says: “Given current levels of debt, UK banks might face higher defaults if interest rates were to rise rapidly from current levels or if income and employment were to fall.”
The Bank of England is under pressure to increase the Bank Rate from its historically low level of just 0.5 per cent amid a jump in inflation.
The Consumer Prices Index, the Government’s preferred measure of inflation, rose to 3.3 per cent in November, up from 1.9 per cent a year earlier.
Today’s report warns that if the Bank Rate rose to 5 per cent, and banks maintained their current profit margins, households would spend more of their disposable income on mortgage interest costs than at any point in the last 20 years.
Families would need to reduce their debt by 15 per cent to reduce their interest payments to long-term average levels.
A 1 per cent rise in mortgage rates would see the monthly repayments on a typical £150,000 mortgage increase from £909 to £989.
A small increase in mortgage rates on top of all the other inflationary pressures that households are facing could be enough to tip some people over the edge.
Economists have warned that inflation will remain high next year, leading to a rise in interest rates.
Vicky Redwood, a senior economist Capital Economics, said: “The combination of tax rises, high inflation and public sector job losses make for a pretty nasty backdrop at the start of next year.”
Howard Archer, an economist at Global Insight, said: “The Bank of England could raise interest rates earlier in 2011 than currently expected. However, we suspect that most Monetary Policy Committee (MPC) members will be willing to hold off from raising interest rates in the near term at least while they wait to see how well the economy holds up as major fiscal tightening increasingly bites in 2011 starting with January’s VAT hike.
“The MPC are also likely to be soothed by current ongoing evidence of wage moderation. We continue to lean towards the view that the Bank of England will not raise interest rates before the fourth quarter of 2011.”
Charities warned earlier this week that home owners are falling behind with their mortgage payments at an alarming rate and that more people would lose their homes next year.
At the height of the credit crisis in 2007, there were 11.4 million outstanding mortgages, according to the Council of Mortgage Lenders. Less than half of these – approximately five million – were on a floating rate, such as a tracker mortgage or a lender’s SVR.
Almost seven million borrowers – or 57 per cent – had a fixed rate deal. But many of these initial deals are coming to an end.
In its report today, the Bank warns that around two thirds of outstanding mortgages – equivalent to 7.2 million – are now variable rate deals.
“Currently, around two thirds of outstanding mortgages in the United Kingdom have floating interest rates, somewhat above the average over the past five years,” the Bank says. “That proportion is rising as mortgagors move on to standard variable rate products as existing fixed-rate deals expire. This exposes more households to the risk of increases in interest rates.”
The Bank goes on to warn that a rise in rates could result in more home owners being unable to afford to repay their loans.
It says: “Given current levels of debt, UK banks might face higher defaults if interest rates were to rise rapidly from current levels or if income and employment were to fall.”
The Bank of England is under pressure to increase the Bank Rate from its historically low level of just 0.5 per cent amid a jump in inflation.
The Consumer Prices Index, the Government’s preferred measure of inflation, rose to 3.3 per cent in November, up from 1.9 per cent a year earlier.
Today’s report warns that if the Bank Rate rose to 5 per cent, and banks maintained their current profit margins, households would spend more of their disposable income on mortgage interest costs than at any point in the last 20 years.
Families would need to reduce their debt by 15 per cent to reduce their interest payments to long-term average levels.
A 1 per cent rise in mortgage rates would see the monthly repayments on a typical £150,000 mortgage increase from £909 to £989.
A small increase in mortgage rates on top of all the other inflationary pressures that households are facing could be enough to tip some people over the edge.
Economists have warned that inflation will remain high next year, leading to a rise in interest rates.
Vicky Redwood, a senior economist Capital Economics, said: “The combination of tax rises, high inflation and public sector job losses make for a pretty nasty backdrop at the start of next year.”
Howard Archer, an economist at Global Insight, said: “The Bank of England could raise interest rates earlier in 2011 than currently expected. However, we suspect that most Monetary Policy Committee (MPC) members will be willing to hold off from raising interest rates in the near term at least while they wait to see how well the economy holds up as major fiscal tightening increasingly bites in 2011 starting with January’s VAT hike.
“The MPC are also likely to be soothed by current ongoing evidence of wage moderation. We continue to lean towards the view that the Bank of England will not raise interest rates before the fourth quarter of 2011.”
Charities warned earlier this week that home owners are falling behind with their mortgage payments at an alarming rate and that more people would lose their homes next year.
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