Rate rise a novelty for some owners

Around one million home owners have never experienced an interest rate rise, having climbed onto their first rung of the property ladder while the base rate has been at its rock bottom level of 0.5%, according to industry estimates.

For sale signs.
For sale signs.

Halifax has looked at what would happen if movements in the Bank of England base rate were passed on in full to someone with 10% equity in a three-bedroom home who is currently on an industry average mortgage rate of 3.09%.

It calculated that a 0.25% rise in the base rate would mean their current typical monthly payment of £609.99 grows to £631.04, swelling the annual cost of their mortgage by more than £250.

Last month, it was revealed that two members of the Bank of England's monetary policy committee (MPC) had voted for a 0.25% rise, in the first split vote on rates since July 2011.

A 0.50% increase in the base rate from its current level would push that home owner's monthly payments to £652.31, making them more than £500 a year more expensive than now, while a 2.50% increase would lift them to £830.18 a month, making them £2,642 a year more expensive than now, if the base rate rise were passed on in full to a borrower, according to Halifax's research.

The number of people falling so badly behind with their mortgage payments that they are having their home repossessed is currently at its lowest levels since 2006, according to the most recent figures from the Council of Mortgage Lenders (CML).

But the Resolution Foundation recently warned that if the base rate moves in line with market expectations to approach 3% by 2018, this could result in around one in four households with a mortgage spending more than one third of their income on their repayments.

The think-tank estimates that around 800,000 borrowers may become mortgage prisoners as interest rates rise, because tighter lending conditions mean they have no option but to stay with their existing lender.

How sharply any home owner feels any increase in the base rate in the near-term will depend on what type of mortgage they have.

According to the CML's data, 90% of new mortgages taken out in the second quarter of this year, made up of those taken out by first-time buyers as well as existing home owners, were fixed-rate products, which cushion against any immediate impact of the base rate increasing.

A further 5% of new mortgages being taken out were tracker mortgages. The CML emphasises that as these figures are for new mortgages only, they do not necessarily reflect the back stock of mortgages.

People who are on tracker mortgages, which are directly linked to the Bank of England base rate, will feel any change that it brings filtering into their borrowing costs.

According to Bank of England statistics, the average rate on a lifetime tracker mortgage was 6.24% in September 2007. This has since more than halved to an average rate of 2.83% by July this year.

Lenders also offer mortgages which are linked to the standard variable rate (SVR), which is a rate that they set themselves. Lenders can, and in some cases have, changed their SVR while the base rate has remained flat at 0.5%.

In September 2007, the average SVR mortgage rate was 7.74%, a figure which has since plunged to 4.36%, Bank of England figures show.

David Hollingworth, head of communications at London and Country mortgage broker, said most people it is seeing are taking a "safety first" approach and opting for fixed-rates.

Giving examples of the choices that people looking for a mortgage currently face, someone with a 40% deposit who wants to protect themselves from any near-term rise in the base rate could consider locking into a five-year fix from the Woolwich with a rate of 3.09%, Mr Hollingworth suggested.

But if that person prefers to take advantage of the base rate's current rock bottom level, HSBC is offering a tracker mortgage at 1.49% above the base rate. At the base rate's current level of 0.5%, this means the rate someone would pay for the HSBC deal would be 1.99%, so more than one percentage point lower than the Woolwich deal. Both the Woolwich and the HSBC deals carry a £999 fee.

Mr Hollingworth said that another possible option for someone currently sitting on a tracker is to chip away harder at the size of their debt by overpaying their mortgage while their repayments are relatively cheap.

"Borrowers should think about what's most important to them and what they will feel most comfortable with," Mr Hollingworth said.

Bernard Clarke, spokesman for the CML, urged home owners to plan ahead.

He said: "They should be anticipating higher borrowing costs and thinking about the impact on household finances, and any adjustments they may need to make.

"Research we have commissioned shows that many households have a high degree of ability to 'flex' discretionary spending and prioritise their mortgage payments.

"Overpaying the mortgage while interest rates are low, or fixing their rate to give certainty about future borrowing costs, may be options worth considering.

"And any borrower that anticipates a payment problem should talk as soon as possible to their lender, who will try to work out with them a plan that will help them get back on track."