First rate rise for 2.6 million first-time buyers: Act now to prevent a mortgage shock

3 November 2017
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With the base rate raised for the first time in a decade, there is an entire generation of mortgage holders in the UK who have never experienced a rise.

According to financial service trade association UK Finance, 2.6 million first-time buyers will be experiencing their first ever rate rise this week.

And according to financial information business Defaqto, for First Time Buyers (FTB) the increase of 0.25% will mean an increase of £19 per month (£228 per year) on average, based on a typical first-time buyers’ mortgage of £150,000 over 25 years remaining.

However, the evidence suggests that the impact of the rate rise on the whole market will be limited.

Think tank the Resolution Foundation’s analysis finds that the combination of falling homeownership, a falling share of homeowners with mortgages, and a falling share of mortgagors on variable rates mean that one in ten families (11%) are likely to be affected in the short term by the rate rise in terms of higher mortgage costs – down from 19% a decade ago.

Only those on variable rate mortgages will be affected immediately. Defaqto says based on a typical existing mortgage of £180,000 with 20 years remaining the increase of 0.25% will mean an increase of £22 per month (£264 per year) on average.

Matt Whittaker, chief economist at the Resolution Foundation explains: “The big changes that have taken place in our housing market over the last decade mean that one in 10 families are at risk of seeing the overnight effect of today’s interest rate decision through higher mortgage costs.”

Structural changes in the housing market mean that far fewer younger borrowers have entered the market in the past decade, with deposits becoming increasingly difficult to accumulate.

The foundation predicts an average increase of £6.40 per month for mortgage holders, not exactly an eye-watering sum. Young people (18-24) have experienced the biggest increases, 2.6% on average. However, a more substantial rate hike to 1% which some are predicting would have a more significant impact. Young people in that scenario would be facing 8% increases on their mortgage payments.

Families aged 45-54 are most likely to be on a variable rate mortgages and face overnight cost increases.

June Deasy, head of mortgage policy at UK Finance thinks the overall impact will be muted: “Most borrowers will be protected from any immediate effects of today’s small increase because they have a fixed-rate mortgage.  Over the last year, two thirds of first-time buyers have opted to fix their rate for up to two years, with a further one in four opting to fix for two to five years.

“Given that variable rate lenders assess the ability of applicants to pay at much higher interest rates, most should be able to cope with any increases as they filter down.” 

Act now to prevent a mortgage shock

While further rate increases are not inevitable, experts are recommending that borrowers look at the market or speak to their provider to find a good deal on a fixed rate to prevent a shock in the event of more increases.

You can also cut your mortgage payments with Moneywise’s weekly guide to the best remortgaging deals.

Daniel Hegarty, CEO at habito thinks that the rate rise is “not good news for mortgage holders on a standard variable rate (SVR)”.

Mr Hegarty adds: “It comes with huge consequences to already squeezed household incomes facing falling disposable income and rising living costs ahead of Christmas.

 “Our research also shows two in five Brits with a mortgage haven’t changed or even reviewed their product in five years and so may be unaware of the impact of the rate change.” 

Brian Murphy, head of lending at Mortgage Advice Bureau (MAB), corroborates this view: “For those with a tracker mortgage linked directly to the BOE base rate, for every £50,000 of borrowing on a 20-year term mortgage, the interest rate change would increase their payments by £6 per month. 

“According to the Bank of England, 43% of homeowners are on variable or tracker mortgages, which opens the possibility for millions of households to see an increase in their monthly expenditure in the lead up to the festive season, as it’s likely that lenders will apply the increase to the next mortgage payment, impacting the penultimate pay packet before Christmas.

“Over the last decade many new borrowers have entered the market and have never experienced an interest rate rise, with the last having taken place in May 2007. As a result, there is perhaps been a level of apathy amongst some regarding the real possibility of a pending increase. The reality is that rates have been on the floor for a long time and, as evidenced today, are not going to get any lower.”

Brian Brown, head of insight for Banking & General Insurance at Defaqto says:

“Even without the base rate change, many providers had already begun to increase their rates, with most fixed rate providers increasing rates on at least some of their deals over the last month.

“Customers though don’t need to panic, as this was a relatively small increase. Any further rate rises are likely to be gradual and there is plenty of time to consider other options.  We would encourage consumers to calculate the costs of switching their mortgage, even if they are not quite at the end of any penalty period. Those coming to the end of fixed rate deals and those on standard variable rates should see a mortgage broker to discuss their options for their next mortgage deal.”

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