HOMEOWNERS with a tracker mortgage have been warned they face a huge hike in their repayments as the Bank of England is set to raise interest rates.
The average bill is expected to rise by more than £880 a year from Thursday as the Bank of England (BoE) increases interest rates to three per cent.
A rise in the BoE’s base rate could spell financial hardship for millions of homeowners (stock image)
There are more than 1.5million households on tracker and variable rate mortgages that will be affected as the pain from the cost of living crisis continues.
Economists are predicting England’s central bank to push up its base rate by 0.75 percentage points to three per cent.
If that happens it would be the largest rise since 1989, taking the base rate to its highest level since the global financial crisis in 2008.
The Bank’s base rate is key in determining the interest rate many lenders charge for mortgages and households not on a fixed rate mortgage will feel the pinch immediately.
Figures from UK Finance show there were 715,000 households on tracker mortgages and 895,000 households on variable mortgages in June this year.
Should the Bank of England raise the base rate to 3 per cent, UK Finance predicts the average household on a tracker mortgage will see their monthly repayment rise by £73.49 per month – equating to £881 annually.
The average standard variable rate mortgage repayment will increase by £46.22 per month – or £554.64 annually.
Fixed rate mortgage deals are less likely to be affected by any Bank of England decision on Thursday as lenders will have already priced expected interest rate rises into any deal.
Nick Morrey, from mortgage broker Cereco told the i: “Given how high rates are now – both the mortgage products and swap rates – we don’t think they will go up much more, if at all.
“In fact, several big lenders have kept them higher than they would normally as they are swamped with processing the large number of applications seen already.
“In truth, we hope to see rates drop a bit over the next few months going into 2023.”
However, households due to come off fixed rate deals in the coming months will still see their monthly payments increased by hundreds of pounds due to previous rate rises.
MONTHLY MORTGAGE PAYMENTS TO RISE
Currently, average rates for a five-year fixed mortgage are exceeding five per cent.
Analysis carried out by Octane Capital shows the average person looking to remortgage following a three-year fixed rate deal could see their mortgage payments increase by £257 from £702 per month to £959 a month, if the Bank of England raises its base rate to three per cent.
Those figures are based on a person who paid a 25 per cent deposit on the average UK house price of £232,096 in November 2019.
A person in that position would have secured an average interest rate of 1.57 per cent on a three-year fixed-rate deal in 2019, but is likely to face interest rates of 5.47 per cent on the same three-year fixed-rate deal now.
Personal finance editor at interactive investor Alice Guy has calculated that a person coming out of a five-year fixed-rate mortgage of £200,000 will see their monthly payments rise by £408 if five-year fixed-rate interest rates remain as they are at around 6.35 per cent.
‘HUGE BURDEN ON FAMILIES’
Ms Guy said: “Spiralling mortgage costs will place a huge burden on families already struggling with increasing food and energy costs.
“There may be a glimmer of light for mortgage holders as there are signs of some banks reducing fixed-rate deals.
“Fixed-rate mortgage rates are affected by long-term interest rate trends as banks want to make sure they have enough money to cover future rate rises.
“Five-year fixes are slightly cheaper than 2-year fixed deals, which is a sign that banks expect interest rates to fall in the medium term.”
A total of 1.3million fixed-rate deals are due to end at some point this year, while 1.8m are due to end sometime the following year.
The rising interest rate has sparked fears of a spike in repossession or where people may be forced to sell their homes as struggling households fail to keep pace with rapidly rising costs.
Chief executive of Octane Capital, Jonathan Samuels, said: “The affordability criteria [used to check that borrowers can deal with fluctuations in the market] that they brought in years ago will protect many borrowers.
“Of course, there may be times when the interest rates exceed even the stress testing of the affordability calculations, but this should be short-lived,” he added.
Senior personal finance analyst at interactive investor Mryon Jobson said: “The spike in mortgage rates in tandem with rampant inflation have pushed many wannabe buyers to the sidelines.
“Even those able to raid the ‘Bank of Mum and Dad’ to bump up their deposit might struggle to afford mortgage repayments.
“The plight of those making a second rung of the property ladder is also important as they are living in homes that many first-time buyers seek to purchase.
“Runaway property prices and rising mortgage rates have left many of these so-called second steppers struggling to trade up to a bigger home.”
Homeowners unable to keep up with the rise in their monthly repayments could be forced to sell their properties (file photo)
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