HOMEOWNERS with a tracker mortgage have been warned that they face a huge increase in their payments as the Bank of England is set to raise interest rates.
The average bill is expected to rise by more than £880 a year from Thursday as the Bank of England (BoE) raises interest rates to three per cent.
There are more than 1.5 million households with adjustable-rate and tracker mortgages that will be affected as the pain of the cost-of-living crisis continues.
Economists predict that England’s central bank will raise its base rate by 0.75 percentage point to three percent.
If that happens, it would be the biggest increase since 1989, taking the base rate to its highest level since the global financial crisis in 2008.
The Bank’s base rate is key in determining the interest rate that many lenders charge on mortgages, and households without a fixed-rate mortgage will feel the pressure right away.
Figures from UK Finance show there were 715,000 households with tracker mortgages and 895,000 households with adjustable mortgages in June this year.
If the Bank of England raises the base rate to 3 per cent, UK Finance predicts the average household with a tracker mortgage will see their monthly payment increase by £73.49 per month, which works out to £881 per year.
The average standard variable rate mortgage payment will increase by £46.22 per month, or £554.64 annually.
Fixed-rate mortgage deals are less likely to be affected by any Bank of England decision on Thursday, as lenders will have already priced in the expected interest rate increases in any deal.
Nick Morrey of mortgage broker Cereco told i: “Given how high rates are right now, both mortgage products and interchange rates, we don’t think they’ll go much higher, if at all.
“In fact, several large lenders have kept them higher than they normally would as they are overwhelmed with processing the sheer number of applications that have already been seen.
“In truth, we expect to see rates come down a little bit in the next couple of months through 2023.”
However, households exiting fixed-rate deals in the coming months will still see their monthly payments increase by hundreds of pounds due to previous rate increases.
MONTHLY MORTGAGE PAYMENTS WILL INCREASE
Currently, the average rates for a fixed five-year mortgage exceed five percent.
Analysis by Octane Capital shows that the average person looking to re-mortgage after a three-year fixed-rate agreement could see their mortgage payments increase by £257 from £702 per month to £959 per month, if the Bank of England raises its base rate to three percent.
Those figures are based on one person paying a 25 per cent deposit on the median UK house price of £232,096 in November 2019.
A person in that position would have earned an average interest rate of 1.57% on a three-year fixed-rate deal in 2019, but will likely face interest rates of 5.47% on the same fixed-rate deal at three years now. .
The personal finance editor of interactive investor Alice Guy has calculated that a person getting out of a £200,000 five-year fixed-rate mortgage will see their monthly payments increase by £408 if five-year fixed-rate interest rates hold. how are they. about 6.35 percent.
‘HUGE BURDEN ON FAMILIES’
Ms Guy said: “Spiraling mortgage costs will place a huge burden on families already struggling with rising food and energy costs.
“There may be a silver lining for mortgage holders as there are signs that some banks are cutting back on fixed rate offers.
“Fixed-rate mortgage rates are affected by long-term interest rate trends as banks want to make sure they have enough money to cover future rate increases.
“Five-year deals are a bit cheaper than 2-year fixed deals, which is a sign that banks expect interest rates to come down in the medium term.”
A total of 1.3 million fixed-rate deals will end sometime this year, while 1.8 million will end sometime next year.
The interest rate hike has sparked fears of a rising recovery or of people being forced to sell their homes as struggling households can’t keep up with rapidly rising costs.
Octane Capital CEO Jonathan Samuels said: “The affordability criteria [used to check that borrowers can deal with fluctuations in the market] they brought in years ago will protect many borrowers.
“Of course, there may be times when interest rates exceed even the stress tests of affordability calculations, but this should be short-lived,” he added.
Senior Personal Finance Analyst at Interactive Investor Mryon Jobson said: “Rising mortgage rates coupled with runaway inflation has pushed many would-be homebuyers to the sidelines.
“Even those who can hold up ‘Mom and Pop’s Bank’ to increase their deposit can struggle to make mortgage payments.
“The plight of those who make a second rung on the property ladder is also important, as they live in homes that many first-time buyers are looking to buy.
“Runwheeling property prices and rising mortgage rates have left many of these so-called ‘second climbers’ scrambling to upgrade to a larger home.”
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