Warning 1% rate rise equals 11% mortgage hike

Last week, the Bank of England confirmed it was holding its base rate at 0.5 per cent for the 85th month in a row, stretching back to March 2009 and meaning around 1.5 million first-time buyers have no experience of moving interest rates, according to Council of Mortgage Lenders data.

Across the UK, the average price of a first-time buyer’s property has risen from £166,000 in 2009 to £204,000 in 2015, the Office for National Statistics states, while Halifax puts the typical house deposit at 17 per cent last year.

Based on this, the typical mortgage for a first-time buyer has increased from £137,000 in 2009 to £169,000 in 2015.

But Alistair McQueen, savings and retirement manager at Aviva, said while the current unprecedented period of stable and low interest rates has greatly reduced the cost of borrowing, fuelling a property boom, a modest rate rise could send mortgage costs spiralling.

He suggested a loose rule of thumb that a 1 per cent increase in interest rates could increase the monthly mortgage bill for those with repayment mortgages by 11 per cent.

“For the one-and-a-half million people who have bought a property for the first time during this period, the idea of rising interest rates is an alien concept, but rising rates will come,” he said.

Aside from those first-time buyers unprepared for eventual interest rate rises, the new normal also impacts repayment and interest-only mortgage holders, according to analysis from Aviva.

Repayment mortgage holders begin with a higher payment, as they are also paying off their underlying loan, but this has the effect of diluting the impact of any increase in interest rates.

Average 2015 first-time buyers with a repayment mortgage could see their monthly payments increase by £96 each month if there was a 1 per cent increase in rates.

Meanwhile, interest-only mortgage holders begin with a lower payment, but feel the full brunt of any increase in rates.

For the one-and-a-half million people who have bought a property for the first time during this period, the idea of rising interest rates is an alien concept, but rising rates will come. Alistair McQueen

Average 2015 first-time-buyers with an interest only mortgage could see their monthly repayments increase by 25 per cent each month (or £141) if hit by a 1 per cent rate rise, Aviva calculated.

London homeowners carry the greatest cost burden, with a 1 per cent increase in rates potentially driving a £265 increase in monthly interest-only mortgage costs from £1,058 to £1,323, according to the provider.

Annual repayments for London homeowners in these circumstances would increase from £12,696 to £15,876, Aviva calculated.

Andrew Wilson, head of investments at Towry, suggested the Bank of England is unlikely act on rates until after the EU referendum and how it acts will completely depend on the result.

Commenting on the February decision to leave rates alone, Capital Economics’ UK economist Ruth Miller said: “Given that the MPC has not sent any signals that it is even thinking about preparing the ground for a rate rise, the chance of a rate hike in the first half of this year looks slim.

“None the less, we still think that markets have gone too far in not expecting a rate rise until 2018. We still think that a rate rise this year is likely, and now expect the MPC to hike in November 2016.”

Total Mortgage Network adviser Danny Matthews said many clients do not care about the interest rates, more about the end result.

He said: “For example: if the base rate went up by 5 per cent, there would still be a ‘best rate’. Time is of the essence though, especially in an interest-only circumstance because of age and affordability now having the biggest impact on these types of clients.”

peter.walker@ft.com