As the Bank of England voted to hold interest rates at 0.5 per cent for the 66th consecutive month this week, housing experts warned that homeowners should not get too comfortable, saying that many could be left in financial difficulty because they are not fully aware of how interest rate rises could affect their mortgage payments.
“Many borrowers have been putting off remortgaging their super-low variable rates because their mortgage repayments are so cheap,” says Aaron Strutt, of Trinity Financial, a broker.
“Banks and building societies typically adjust their standard variable rate following a Bank of England base rate change. As there hasn’t been any movement for so long, they simply haven’t changed their rates but normally lenders are pretty quick to factor in a rate increase.”
The standard variable rate (SVR) is what most people’s mortgages default to when their current deal — often a fixed or tracker loan — comes to an end. They are pegged to the Bank of England base rate and many are quite high already, potentially adding hundreds of pounds to annual mortgage payments. For instance, Chelsea Building Society’s SVR is 5.65 per cent, Newcastle Building Society’s is 5.99 per cent and Kent Reliance’s 6.08 per cent.
Research by Halifax found that a 0.25 per cent base rate rise could add £250 per year to a typical mortgage. The lender looked at someone with 10 per cent equity in a three-bedroom home on an industry average mortgage rate of 3.09 per cent. If base rates returned to 3 per cent, which is still below long-term averages for UK rates, the average mortgage repayment would hit £830.18 a month, making it £2,642 a year more expensive.
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Chloe Fisher, 29, and her boyfriend Peter Waters, 30, are overpaying on their mortgage now to reduce as much interest as they can before rates rise.
They took out a two-year fix at 3.29 per cent in February to buy a three-bedroom £300,000 house in Welwyn Garden City, Hertfordshire. “We will definitely try to remortgage because we know SVRs could be really high,” says Ms Fisher. “It’s not something I was aware of at first — it is scary how much more payments could be.”
Most people predict base rates will rise about February next year, but last month two members of the monetary policy committee voted for an immediate base rate rise. However, investors must wait two weeks for the publication of the minutes of this month’s MPC meeting to know what its members voted this time round.
By contrast, Skipton Building Society has announced that it will cut its “revert-to” mortgage rate by 0.5 per cent. From October 1, the lender will lower its residential “mortgage variable rate” to 4.99 per cent. The mutual was pilloried in 2010 when it raised its SVR from 3.5 per cent to 4.95 per cent, citing “exceptional circumstances” and adding £124 to an average monthly mortgage. Two years later it also introduced an MVR of 5.49 per cent for new customers.
“This is good news for some borrowers, obviously,” said David Hollingworth of London & Country, a broker, who added that the lender was most probably trying to bring its “revert-to” rates more in line with the rest of the market. “But what it also shows is that lenders can do what they like with their SVRs, which is a worry.”
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Mr Hollingworth added that it was unlikely other lenders would follow in Skipton’s footsteps. “Recent years have seen more lenders push up their rates than reduce them,” he says.
Help to Buy
The government has released figures for its Help to Buy scheme, which was designed to help buyers with low mortgage deposits, hailing it a great success.
However, the small print suggests there has been a lower take-up than expected for the mortgage guarantee element, which was introduced in October last year.
The Treasury set aside £12 billion in guarantees for three years to back the scheme, but after nine months, just £388 million (3 per cent of the allocation) has been used.
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There were 18,564 mortgages completed under the mortgage guarantee scheme, of which 79 per cent were by first-time buyers.
The average property value was £153,148, which compares to a national average house price of £265,000.
Kate Faulkner, of the Property Checklists website, said the mortgage guarantee element compared unfavourably with the equity loan part of the scheme, which only applies to newbuilds and which many industry analysts prefer as it encourages housebuilding.
“The main difference between the two schemes is one is good for the industry, economy and helps consumers, the other one hasn’t really made any difference and was an unnecessary market.