HOMEOWNERS are being warned that mortgage bills could rise by £7,300 a year if interest rates hit 6%.
Around, 1.8million mortgage customers are on fixed deals which are set to end in 2023, according to UK finance.
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Interest rates are now expected to rise to 6% next year, following the chaos of Chancellor Kwasi Kwarteng’s mini budget.
This sent the pound plummeting against the dollar to a low of $1.03 yesterday, which caused a string of major mortgage lenders to pull fixed deals.
Cheaper mortgage deals have been disappearing in recent months.
It means that someone on a two-year fix which expires next year, when the base rate is at 6%, would see their monthly repayments jump from £600 a month or £3,296 a year, according to AJBell.
This is based on them taking out a £20,000 repayment over 25 years in March 2021, paying 1.5%.
While someone on a variable rate £400,000 mortgage on 5.4% would see bills jump by £965 a month or £11,580 a year if rates hit 6%
Some experts warn that the rising cost of living could also cause hell for homeowners looking for new mortgage deals and impact house prices.
Karen Noye, mortgage expert of Quilter, said: “Rates of 6% could prove disastrous for the property market as people simply won’t be able to afford their mortgage payments if they have overstretched themselves.
“This could cause a wave of properties come to market just when demand is drying up.
“House prices will naturally come down if this happens.”
What about other mortgage customers?
Those on fixed deals beyond early 2023 should be protected from the rate rises.
Those on variable or tracker mortgage deals have already noticed an increase in rates, as they are linked to the Bank of England’s base rate.
Experts have urged those customers to move on to fixed deals – but many of those are disappearing.
Several lenders including Halifax, Virgin Money and Skipton Building Society have now pulled fixed deals for new customers.
First-time buyers may also find it harder to get loans due to affordability and higher rates.
Those on fixed deals which end soon may be considering leaving their agreements early. They will have to factor in any early repayment charges.
But Nicholas Mendes, mortgage technician director at broker John Charcol, previously told The Sun: “If you are looking at your fixed-rate mortgage which has six months left, and don’t want to pay an early repayment charge to switch to a new rate now, you can fix a deal six months in advance with most lenders.”
Homeowners will need to crunch the numbers on whether it’s cost-effective to gamble and fix now, even factoring in any early repayment charges.
What is happening to the pound and interest rates and why does it affect mortgages?
Sterling hit a record low against the dollar yesterday – the lowest since decimalisation in 1971.
The value of the pound fell by more than 4% to just $1.03 in early trading in Asia, before recovering to $1.06 yesterday afternoon.
It prompted the Bank of England to say it “won’t hesitate to change interest rates”.
A raft of tax cuts unveiled on Friday last week and growing concerns for the impact on inflation prompted the fall.
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Last night the Bank of England promised that it will not hesitate to increase rates again and that it was watching falls in the pound closely.
The BoE already increased interest rates by half a percentage point to 2.25% last Thursday.
But the pound steadied in early trading in Asian markets this morning as it recovered ground slightly from the record low of $1.03 against the US dollar.
Sterling sat around around $1.08 at 1.30pm on Tuesday, but economists have warned it could still fall to parity with the dollar this year for the first time.
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But a number of major lenders have now pulled fixed loans due to uncertainty around borrowing following the raft of tax cuts last week.
Much of this was unfunded and needs to re financed through issuing gilts. Changes to the gilt market impact swap rates, which lenders use to make pricing decisions.
Mortgage brokers say they haven’t seen anything like it since the credit crunch of 2008.
Analysis of the market by Moneyfacts.co.uk found that on Friday last week, the day of the mini-budget, 3,961 residential mortgage products were available.
By Monday this week, the total had fallen to 3,880.
By Tuesday, it had shrunk further to 3,596 deals – a reduction of 365 compared to Friday.
What’s happening to mortgage rates?
Mortgage rates are already rising partly due to soaring inflation.
The string of Bank of England base rate increases which have already taken place in recent months mean that a tracker mortgage is now about £210 per month more expensive, on average.
A standard variable rate (SVR) mortgage is now about £132 more expensive per month, according to the figures from UK Finance.
While first time buyers face monthly repayments upwards of £1,100, a third more than they were paying in January, according to property portal RightMove.
Sarah Coles, senior personal finance analyst, Hargreaves Lansdown said: “Fixed rate mortgages don’t just depend on the rate today, they also depend on rate expectations.
“The key for the mortgage market is gilt yields. When rates rise, gilt yields also rise, and these feed through into the swap rates that drive the fixed rate market.
The dramatic fall in the pound on Monday led to fears of inflation – because the price of anything that’s imported will rise. As a result, it led to expectations that the Bank of England would hike rates to try to bring it back down again.”
