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Get ready for sharp rise in mortgage rates, warns Bank of England as experts predict homeowners will pay thousands of pounds more a year

Published 17th May 2012

* Experts fear some of Britain's 11.2million mortgage holders may be 'pushed over the edge' by hikes
* Banks blame eurozone crisis for driving up cost of borrowing - then pass cost on to consumers
* But the Bank of England's base rate of interest is STILL at record low of just 0.5 per cent after 38 months
* Experts urge any mortgage holder on a variable rate to secure a fixed-rate deal as soon as possible

Homeowners should brace themselves for sharp increases in the cost of their mortgages, the Bank of England warned yesterday.

It is a bitter blow for Britain’s 11.2million mortgage holders and comes as a direct result of the chaos in the eurozone.

The crisis is driving up the cost of borrowing for high street lenders in this country – and they aim to ‘restore’ their profit margins by passing on that cost.

Experts fear higher rates will mean many homeowners will have to find thousands of pounds extra a year, and some will be pushed ‘over the edge’.

The warning comes on a bleak day for the economy, which is stuck in a double-dip recession as policymakers and politicians try to insulate it from Europe’s chaos.

The Bank said the eurozone crisis is beginning to hit homeowners, many of whom are already struggling to find the money to make their monthly repayments.

Since the start of the year, the funding costs for the high street banks have soared – and they are passing on the pain to their customers, including homeowners and savers.

The Bank’s report warned: ‘In the absence of falls in funding costs, it suggests that some further increase in mortgage rates is likely as banks seek to restore their margins.’

Some of the biggest mortgage lenders, such as Halifax, the Co-op and Yorkshire Bank, have already hit their customers with an increase in their ‘standard variable rate’ loans.


The financial regulator has warned that homeowners in their 50s are sitting on ‘a ticking timebomb’ of mortgages handed out during the boom years.

During a grilling by MPs last month, Martin Wheatley, a director of the Financial Services Authority, raised his fears about interest-only mortgages which are coming to the end of their life – but the homeowners have no money to pay off the loan.

Of the 11.2million mortgages in Britain, about four in ten are interest-only, meaning the homeowners pay only the interest but not a penny of the actual loan.

Between 2011 and 2020, the FSA expects about 1.5million such mortgages – worth a staggering £120billion – ‘will be due for repayment’.

Mr Wheatley told the Treasury select committee: ‘There is a ticking timebomb that has been created over the last 20 years.’

The FSA said its figures mean 150,000 interest-only mortgages will come to the end of their life every year for the next decade.

The vast majority of people with these types of loans – 80 per cent – have ‘no repayment strategy’, the FSA said.

This is the type of loan which homeowners are automatically moved on to when their current deal, such as a two-year fixed loan or a three-year tracker, comes to an end.

Up to eight million homeowners are thought to be on a variable rate, according to the Council of Mortgage Lenders. This includes those on tracker deals as well as those on the SVR. However, many of those on fixed rates will have to remortgage in the coming months as their deal expires.

Experts said cheap deals are being replaced every day by more expensive options.

Last Friday, Yorkshire Building Society raised its two-year fixed rate loan from 3.24 per cent to 3.54 per cent. Tomorrow ING Direct will raise its two-year fixed from 3.29 per cent to 3.49 per cent.

Any hike of interest rates risks sparking a fresh rise in the number of home reposessions, which had stabilised only this month, according to data from the Council of Mortgage Lenders.

The 9,600 repossessions between January and the beginning of April was the same number as a year ago, breaking the recent trend of year-on-year increases.

Record-low interest rates have helped mortgage borrowers in the past two years, despite the banks lending at much higher rates than the Bank of England 0.5 per cent base rate, and 2011 saw the lowest annual number of repossessions in four years - at 36,200 homes.

The CML had said it could this summer revise the expected number of homes reposessed in 2012 down from 45,000, but the fresh warning over interest rates has now put that at risk.

Presciently, the CML said in a statement last week: 'Continuing pressures on household finances, changes to welfare benefits and an upward drift in mortgage rates all have the potential to disrupt the current stable picture.'

Experts have for weeks been advising SVR mortgage holders with equity in their property to scramble to get back onto a fixed rate while deals are still available.

Tiffany Clayton, 23, a personal assistant, and her boyfriend, electrician Carl Pritchard, 24, are preparing to remortgage their property after their fixed rate deal ended last month.

The couple, from Caterham, Surrey, are now paying Halifax’s 3.99 per cent SVR after their two-year 4.2 per cent fixed-rate deal ended on April 9.

But although the SVR is lower than the fixed rate, the couple are uncomfortable with a floating rate that they fear could rise further.

Miss Clayton said: ‘I have already spoken to an independent broker about remortgaging. We definitely want another fixed rate.

‘We have equity in the property so we should be able to fix for two years at an even lower rate than 3.99 per cent. This is our preferred option because we don’t want sleepless nights about rates going up.’

Una Farrell, of debt advisers the Consumer Credit Counselling Service, warned: ‘The margin between being able to pay your mortgage and falling into arrears is paper-thin for many.

‘Even a small increase in their mortgage costs will push many over the edge.’

Around one in ten homeowners with a loan are in ‘some form of distress’, which typically means they have fallen behind with their repayments, according to the CCCS.
‘The margin between being able to pay your mortgage and falling into arrears is paper-thin for many. Even a small increase in their mortgage costs will push many over the edge’

One of the charges levelled against the banks is that they are raising rates even though the Bank of England base rate has been frozen at 0.5 per cent since March 2009.

Marc Gander of the Consumer Action Group, said: ‘The taxpayer imagines that part of the deal is that, having rescued the banks, they will help homeowners and businesses. But people are thinking to themselves “This is not happening”.’

A Council of Mortgage Lenders spokesman said it was wrong to assume that banks could borrow money at 0.5 per cent base rate.

She said: ‘Effectively, the cost to the lender of borrowing money from savers has risen.

‘Also, problems in the eurozone have been causing significant difficulties in recent months, and funding costs are higher than they were a year ago.’

Source: ' ThisIsMoney '

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