Borrowers in the UK are facing a period of unprecedented financial pressure in the next 12-24 months as the number of homeowners coming off fixed rate mortgages and onto standard variable rates (SVRs) is expected to hit 1.8 million in 2023, according to figures from trade body, UK Finance.
The ramifications of this are hugely significant for the mortgage market and will likely cause an enormous amount of financial pressure on the household finances of UK homeowners as they exit their current deal and remortgage onto a new deal or onto a follow-on rate with their lender.
One of the main issues facing borrowers coming out of fixed rate products this year is the impact of rate shock on their finances as many homeowners will experience a significant jump in the mortgage repayments due on their loan as a result of rising interest rates, which have increased six times since December 2021.
This, coupled with the squeeze in everyday living costs is likely to leave a lot of borrowers in a precarious position as we head towards the new year and means many people may find their homes are no longer affordable. This poses a significant risk to the mortgage market, the wider economy and to the livelihood of many consumers.
To fully understand the severity of the situation, it is important to draw comparisons between where rates have sat over the last two to five years and today’s base rate of 2.25%, which is the highest it has been since 2008.
A borrower who took out a £200,000 loan on a 25-year term two-year fix with an interest rate of 2% in 2020 for example, would have had a monthly repayment amount of £848 per month.
Today, with the average two-year fixed rate mortgage sitting at 4.09% – 62.3% more expensive than this time last year according to Moneyfacts – that figure jumps to £1,066 per month, an increase of £218 each month or £2,616 a year.
In addition, the lifting of the energy price cap from £1,971 to £2,500 in October this year along with the tranches of people coming off a fixed rate deal in 2022 means many people are going to be faced with the double whammy of increased mortgage costs and higher energy bills that is going to hit their finances extremely hard.
And while the recent announcement by the new Prime Minster of a £2,500 energy cap coupled with the £400 reduction in bills may in some way relieve the pressure under which households find themselves, predictions that inflation will hit 14% by the end of the year remains a significant and ongoing concern for many.
Unfortunately, it would appear that there is no let-up in sight with economists predicting further rate rises in the coming months and longer forecasts suggesting the base rate could reach 2.50% by the end of the year and 3% by the end of Q1 2023. And with the ONS reporting a fall of 3% in real wages over the last quarter, the gravity of the situation is really starting to hit home.
The volatile interest rate environment, inflationary pressure and high business volumes are also causing a lag in lender turnaround times, forcing many to retreat from competing at the highest level for business while some smaller players have withdrawn from the market due to funding concerns, meaning cheaper and more competitive mortgage deals are less prolific.
The next 12-18 months look set to be a challenging time for the mortgage market and wider UK economy as the impact of rising inflation, increasing interest rates and escalating living costs take hold. Borrowers concerned about the effect this may have on their household budgets should seek advice to ensure they are fully prepared.
Hiten Ganatra is MD at Visionary Finance