Financial information company Moneyfacts has revealed alarming figures, indicating that the average two-year fixed rate mortgage has climbed to 6.01%, a rate not seen since December. The cost of mortgages continues to rise, with the average five-year fixed rate reaching 5.67%. As a result, homeowners may face hundreds of pounds in additional annual expenses just to retain their properties amidst the ongoing cost of living crisis.
The rising mortgage rates have left homeowners wondering why this is happening and what actions they can take. The Bank of England’s consistent increase in interest rates has led to a corresponding rise in mortgage rates. The central bank’s objective is to keep inflation at 2%, but inflation has stubbornly remained high, currently standing at 8.7%, since Russia’s invasion of Ukraine in February 2022. With 12 consecutive rate hikes, the Bank of England finds itself in a difficult position, caught between the pressure on mortgage borrowers and the risk of spiraling inflation.
Various types of mortgages are available to borrowers, each with its own implications. Standard variable rates fluctuate based on the lender’s decision, while fixed rates are set for a specific period, after which borrowers must remortgage or switch to standard variable rates. Tracker rates are directly linked to the Bank of England’s interest rates, rising and falling accordingly.
The significance of this issue cannot be understated, as demonstrated by Moneyfacts’ report. For instance, an individual with a £250,000 mortgage over five years, established in 2018, would have initially paid approximately £1,175 per month. However, under the current circumstances, that figure has risen to £1,553 per month. Although less than 30% of UK households have mortgages, 7.5 million people in the country hold a staggering £1.7 trillion in mortgage debt.
Unfortunately, despite the worsening situation, Prime Minister Rishi Sunak has indicated that the government has no plans to provide financial assistance for mortgage bills. Sunak’s focus remains on halving inflation, expressing confidence that the government’s plan will address the crisis effectively. He emphasized the support already provided to first-time buyers and the mortgage interest scheme. While Michael Gove, the Levelling Up Secretary, mentioned that mortgage assistance is being considered, any decisions regarding financial support will ultimately rest with the Treasury.
However, experts and industry insiders caution against government intervention. Former Bank of England deputy governor Sir Charlie Bean warns of the risks associated with Downing Street’s involvement in the mortgage market as interest rates continue to climb. Additionally, concerns arise that providing assistance solely to mortgage holders might alienate other groups, such as older voters who own their homes outright or younger individuals unable to afford homeownership.
The next step in this ongoing crisis is eagerly anticipated. The Bank of England is expected to announce additional interest rate hikes later this week, potentially raising rates to 4.75%. The Resolution Foundation think tank estimates that mortgage repayments for those renewing next year will increase by an average of £2,900 annually. Their projections suggest that the average two-year fixed rate mortgage will not fall below 4.5% until the end of 2027, potentially resulting in a £200 increase in monthly repayments with a 3% rate increase.
To alleviate concerns about mortgage repayments, homeowners are advised to promptly contact their mortgage providers. These providers may offer options such as extending mortgage terms, making longer-term payments, or granting a mortgage holiday. Engaging in discussions with mortgage providers does not negatively impact credit ratings, although taking action on these options might.
It is crucial to avoid missing mortgage payments, as this can lead to falling into arrears. Should two or more months’ repayments be missed, homeowners will be considered in arrears by their mortgage providers. However, lenders are obligated to treat borrowers fairly and may offer reduced payments for a brief period. Nevertheless, missed payments and arrangements with lenders will be reflected on credit files, potentially making it more challenging to secure future loans.
Homeowners who anticipate difficulties meeting their mortgage repayments should contact their lender as soon as possible. Within 15 days of falling into arrears, lenders are required to provide borrowers with a breakdown of the total arrears, outstanding mortgage amount, missed payments, and any additional charges. While there is a risk of losing one’s home in rare circumstances, lenders must follow certain procedures before repossession, a process that could take up to two years.