On August 7 the Bank of England increased the base rate by 50 basis points to 1.75 per cent. The days of ultra-cheap mortgages are over and we are going to have to get used to a new norm.
With a global inflation crisis driven by increasing energy prices and supply chain issues, the BoE does not have many tools at its disposal to try and choke off the highest level of inflation we have seen for 40 years.
One mechanism they do have is the ability to raise interest rates. We have been living in period of ultra-low interest rates, which were put in place after the financial crash to help stimulate the economy and encourage spending.
Interest rates have been rising from an all-time low of 0.10 per cent to 1.75 per cent with more increases predicted for the rest of 2022. What does this mean for UK mortgage holders?
Circa 74 per cent of mortgagors have a fixed rate mortgage. This will be a relief for most borrowers whose monthly mortgage payments will not be affected until their fixed rate ends.
With these large increases in mortgage rates it is likely that the default rate will increase.However, most people will have fixed their mortgage for either two or five years, hence it will not be that long for many borrowers until their rate is up for renewal. This will be a significant blow to many households who are already struggling with higher outgoings.
For those with a mortgage, now is a good time to explore the rate they are paying and consider locking in a new rate.
After the financial crash there has been strict mortgage regulation in place to help try and prevent another crash from occurring. Anybody who has applied for a mortgage recently will have already been subject to the strict guidelines from the Financial Conduct Authority that the banks have followed.
This includes banks assessing how much you can borrow based on a multiple of your income/or joint income (usually circa 4.25 to 5 times income multiple) and strict affordability testing, which includes the bank collating details of your current contractual and discretionary monthly outgoings and then stress testing your mortgage payments at a much higher rate than what you would have actually been paying.
Most regulated mortgages (a mortgage that is secured against a house you live in) may have been assessed at a pay rate of circa 6 per cent to 7 per cent. This may have seemed conservative at the time if you were able to borrow at a fixed rate of sub 2 per cent (even sub 1 per cent fixed at some points during last year).
Many of the current fixed rate deals available are circa 3.5 per cent plus, and are likely to increase further quickly.
Mortgage underwriting criteria has been strict for a long time with banks consciously not lending borrowers as much as many would want to borrow or feel they could have afforded at the time.
Mortgage arrears have been incredibly low and it seems large increases in the BoE base rate have already been factored into calculations, so we can hopefully breathe a sigh of relief that mortgage arrears may not be as bad as they could be.
It must be noted though that with these large increases in mortgage rates it is likely that the default rate will increase.
Other factors contributing to arrears could be that mortgagors may have taken out more credit since they took out their mortgage or their circumstances may have changed (income decreased) and their other outgoings will most likely have increased due to the inflation we are seeing.
Consider paying more now, so that when rates go up the shock element of the rise is removed.If your client is struggling to pay their mortgage, burying one's head in the sand is the worst thing that they can do. Contact the lender as quickly as possible and explain the scenario. Lenders have specialist support teams who can help.
Lenders must treat clients fairly and should work with them to find a way to ensure that they do not lose their home.
They may be able to agree to extend the term of the mortgage, bringing down monthly payments; they may accept smaller payments in the short term; or the borrower may be able to stop making payments for a while in some scenarios.
Any mortgage-holder with a cheap rate at present would do well to examine their monthly finances and re-budget and consider paying more now, so that when rates go up the shock element of the rise is removed.
Re-budgeting now to pay off as much as possible each month can cushion the blow and help reduce your mortgage balance.
Adrian Anderson is a director at Anderson Harris
