The Bank of England wasn’t really getting into the spirit of the season when it warned recently that many homeowners could be facing mortgage misery in the coming year. This warning was aimed at the eight million borrowers who are no longer on fixed mortgages. Two thirds of the country’s twelve million mortgage holders are now on floating deals – either tracker deals or the lender’s standard variable rate (SVR) – which means that they will face an increase in payment if there is an upward change in the Bank of England’s base rate. It is currently held at 0.5%, an historical low, but many experts believe that the bank will be forced to put it up in 2011 to keep inflation under control.
The bank is worried that many months of rock bottom interest rates have tempted numerous homeowners onto variable rates when their initial fixed-rates expired, leaving them exposed to the affects of any rate rises. For example, on an average £150,000 mortgage, an increase of just 0.5% interest would mean extra payments of £43 per month – that’s £516 per year. This illustrates how a very modest rate rise can have a significant impact on personal finances.
Any mortgage payment rise in the New Year will put household finances into an unprecedented squeeze on top of the rise in VAT from 17.5% to 20%. Set into a background of deep cuts in public spending, rising unemployment and the soaring cost of everyday goods, it’s not difficult to see why the bank is pessimistic. House prices are already 14% lower than their 2007 peak and the bank warns of ‘further downward pressure’ on house prices in the coming year. Some economic commentators believe that property is currently 20% over valued and that it could fall by that amount in the next two or three years. This would be catastrophic for those who stretched themselves to get on the market recently.
It is probably fair comment to say that people have become complacent with interest rates being so low for so long. Unfortunately, with the base rate at an all time low, there is only one way it can go – it’s just a question of when. For this reason, if you are on a tracker or are thinking of moving to one, then consider the following; are there any early redemption penalties if you decide to jump ship and, is it capped at a certain interest rate? Either of these two features would be a great addition to your policy if inflation kicks in and interest rates start to rise.