Is Your Mortgage About To Become A Ticking Timebomb?

Millions of homeowners across the UK are facing what is being dubbed as a ‘mortgage timebomb’ as those with tracker or fixed variable mortgages are looking at a 0.5% hike in interest rates, making it the largest increase since 1997.

The decision to raise these rates has come shortly after Governor Andrew Bailey also predicted the UK will collapse into a year-long recession by the end of 2022. This would make it the longest one since the 2008 financial crisis and as deep as the one in the 1990s.

Governor Bailey also went on to say that inflation will now be peaking at more than 13% – 11% above his own target, being fanned by the soaring price of gas and fuel this winter.

Rising Interest Rates

Yesterday the Bank announced a 0.5%-point interest rise, the biggest rise in 27 years. The base rate is now at a 13-year high of 1.75%, up from 1.25%. They have done this in an attempt to control the spiralling inflation and as banks use the base rate to set mortgage costs, it means that around 2 million homeowners who have tracker or variable rate loans face massive bill hikes as a result.

Interest-only mortgages work by allowing the homeowner to only pay the interest on their mortgage each month, meaning that the real amount owed remains the same.

Homeowners who are locked into cheap fixed deals will be protected from any immediate increase in bills but once they expire, they face paying thousands of pounds more each year at a time when thanks to the cost of living crisis, bills are already soaring.

According to figures from broker L&C Mortgages, borrowers with a £150,000 mortgage on the average variable-rate will have to pay an extra £44 a month, or £528 a year and those who have £400,000 home loans will be faced with having to find an extra £131 a month or £1,572 as year.

Tory Leadership favourite Liz Truss has claimed that a recession is ‘not inevitable’ and has said that “’We can change the outcome and we can make it more likely that the economy grows.” Rishi Sunak claimed interest rates would reach as high as 7 per cent under his rival Liz Truss’s proposals. He also predicted the UK will collapse into a year-long recession by the end of 2022.

One in Ten Households Unprepared

The Council of Mortgage Lenders (CML) now estimates that around 1.9 million borrowers, approximatley 21% of all homeowner mortgages, are just paying off the interests on their debts without making a dent in the capital.

One in 10 households are believed to not have a strategy to repay the mortgage once the loan expires, meaning that they would have to sell their home or have it repossessed if they cannot find sufficient funding.

CML has stressed that the number of homeowners on interest-only mortgages has shrunk despite the figures.

A spokesperson for UK finance, formerly known as the CML said “The interest-only loan book was 3.2 million in 2012, it has now fallen to 1.9 million. We have seen four years of fairly steady decline, at a rate of between 10 and 13 per cent a year.”

They went on to say that “While there may be some individual borrowers who would reach mortgage maturity without a robust repayment plan, this was not the case for most – the progress made on interest-only has been encouraging.”

What Does This Mean For The Future?

We spoke to Karl McArdle, CEO of The Property Buying Company on his thoughts about interest rates rising “I predict the 0.5% rise in interest rates is just the beginning, with more to come – it could reach as high as 2.5% by the end of the year to curb inflation. With the rising cost of energy, inflation and now interest rates, I think we will see the property market start to slow down. The property market has experienced sustained growth over the past 18 – 24 months much to the surprise of some analysts, however there won’t be a sudden ‘pop’ of the bubble, rather a gradual slow down in the market as the interest rates rise alongside the cost of living crisis.”

He continued to say “Unlike 2008 where there was a banking crisis or ‘credit crunch’ there is still much liquidity in the market. Banks are happy to lend but what we might see is a reluctance by surveyors to value properties that they think have been overpriced or have seen an offer in excess of the asking price up thus down-valuations may start to occur. This will steady prices and we might see some falls in localised markets where we have seen excess and rapid increases in property prices. So, no pop, just a gradual slow-down which might see some price falls in certain markets.”

That covers everything you need to know about the rising mortgage rates. If you have any questions, queries or insight into this subject please feel free to get in touch!

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photo of Alexandra Ventress

Alexandra is a junior content producer who enjoys writing articles and finding out more about the property market.

About Alexandra Ventress 32 Articles
Alexandra is a junior content producer who enjoys writing articles and finding out more about the property market.

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