Soaring interest rates mean hundreds of thousands of homeowners face a remortgage crisis next year as deals become unaffordable even for wealthy borrowers, new research suggests.
The Bank of England this week raised interest rates for the seventh consecutive time, bringing the Bank Rate up to 2.25pc in a move that will push mortgage rates even higher. Further increases are in the pipeline.
Economists’ consensus is that the Bank Rate will peak at around 3.5pc next year, but markets have priced in a Bank Rate peak of 4.5pc.
In this scenario, homeowners could see their bills surge by more than 50pc when they remortgage next year. Mortgage rates will be so high that experts have warned that large numbers of homeowners could fail to meet lenders’ affordability criteria to remortgage and be forced to pay higher rates as a result.
Lewis Shaw of Shaw Financial Services, a broker, said as many as one in five mortgaged homeowners could fail affordability checks when they came to remortgage.
He said: “These people may be trapped with a lender that doesn’t allow them to remortgage.”
Borrowers will be particularly at risk if they have taken on other debts since they took out their original mortgage deal, he said.
Pantheon Macroeconomics, an analyst, warned that homeowners would be hit on two fronts: not only will their mortgage rates have risen but inflation will have increased their outgoings.
Most lenders have a “product transfer” option – a rate that existing borrowers can switch to at the end of their fixed-rate deal without affordability checks.
However, these rates are typically one percentage point higher than remortgage rates, Mr Shaw said.
An estimated 1.8 million homeowners will come to the end of their fixed-rate deal in 2023, according to UK Finance, a trade body. If a fifth are unable to remortgage, 360,000 families could get pushed on to more costly deals.
Borrowers coming to the end of their fix already face huge jumps in payments. A homeowner who bought an average property two years ago could see their monthly bill jump by 52pc if they remortgage with the Bank Rate at 4.5pc, according to Hamptons estate agents.
Their monthly mortgage bill would jump from £734 to £1,116. This calculation assumes that a buyer purchased a home for the average price of £242,000 with a 25pc deposit and includes an adjustment for 22pc house price growth over the two-year period.
If they were to remortgage with the Bank Rate at 3.5pc, their remortgage bill would be £1,014 – a jump of 38pc.
Homeowners are already getting hit.
Earlier this year Rob Baker, 52, started looking at his options for when his two-year mortgage deal expired this month. He was on a tracker rate, which started at 2.75pc and rose to 3.85pc. But his options to remortgage were even worse.
He said: “The best fixed-rate deal I could have got with my lender was 4.8pc.” This means his interest bill would have jumped by more than a quarter.
“If you’re paying 30pc more on your mortgage, nobody is Teflon. What would go? Holidays, school fees, cars?”
Mr Baker turned to the specialist market and got a 3.85pc deal with LiveMore Capital, a lender for homeowners over 50. He has fixed for 10 years.
The stamp duty holiday from July 2020 to September 2021 brought a boom in transactions, which will bring a boom in remortgaging next year.
UK Finance has estimated that half a million homeowners will be coming to the end of two-year fixes in 2023, meaning that they took out loans when the Bank Rate was at a record low of 0.1pc and will remortgage just as interest rates are expected to peak.
Building up equity will not be enough to offset the enormous jumps in interest rates. Even in June the rate for a two-year fix for a homeowner with a 60pc mortgage was 1.03 percentage points higher than the fixed rate for an 85pc mortgage two years ago, according to Pantheon.
Two thirds of borrowers already have mortgages of 75pc or less. Even if these homeowners are able to reduce their mortgages to 60pc when they refinance, they are unlikely to benefit from lower rates.
In July the average rate for a 60pc mortgage was 3.51pc – 0.07 percentage points higher than the average 75pc deal. The remortgage crunch is key because it could put existing homeowners under pressure to sell.
Neal Hudson of BuiltPlace analysts said: “For rising mortgage rates to turn into a house price crash would require a large number of forced sellers. Unfortunately, the cost of living crisis increasingly looks like it may lead to that.”
More than a fifth of mortgaged homeowners have already looked into changing mortgage deals simply because they cannot keep up with payments, according to research by iPlace Global, a property technology company.
Last month the Bank of England scrapped a requirement for lenders to stress test borrowers at three percentage points above the standard variable rate.
Now lenders are required to stress test borrowers only at one point above SVR. This should make affordability tests easier to pass, although interest rates are rising so fast that much of the benefit has already been wiped out.