Mortgage payments are set to increase by around £3,000 a year for approximately four million homeowners next year, the Bank of England has warned.
In its Financial Stability Report, published yesterday, the Bank said economic conditions had deteriorated and the risk of households defaulting on debt has increased.
People with a fixed-rate loans due to expire by the end of 2023 are facing average repayment hikes of around £250 a month as they are forced to move onto a higher interest rate.
This would mean that mortgage costs surge by £3,000 a year for many families who are already seeing their finances stretched to breaking point during the cost of living crisis.
The new estimate is based on market lenders’ interest rates at the end of November. The Bank’s base rate is currently set at 3%, but is set to increase again tomorrow – possibly to 3.5%.
The BoE predicted that 2.4% of households would find themselves with mortgage payments that they would find hard to afford.
“The risk that indebted households will default on loans, or sharply reduce their spending, has increased,” the report said.
Responding to the latest summary and report from the Financial Policy Committee, Nathan Emerson, chief executive of Propertymark, commented: “The announcement from the Financial Policy Committee paints a brighter picture than first imagined. Despite mortgage, energy and other costs rising, it is reported that households are in a better financial position than predicted when compared to the global recession in 1990 and the financial crisis in 2007/8.”
The Bank said average mortgage rate rises in 2023 would mean the typical household would see payments rising from £750 to £1,000 – equating to around 17% of average pre-tax incomes. Over six million households will see mortgage payment hikes by the end of 2025.
But Emerson said that agents are reporting that mortgage rates and offers are starting to improve.
He added: “With a rebalance being seen within the market in terms of house prices and competition for homes, people are keeping a close eye on trends and continuing to move more sensibly compared to previously seen.”
Might I request some journalistic integrity?
The headline reads: “Mortgage payments set to rise by £3,000 a year”
The first line of the article reads: “Mortgage payments are set to increase by up to £3,000″
There is a massive difference in the meaning of those two statements.
The rest of the article is not really any better.
The problem is that most people find percentages hard to deal with so there is a habit of trying to turn them into real numbers.
At 1.25% a £250k mortgage will cost about £970 per calendar month over 25 years. It was common before the current financial crisis to be able to agree a mortgage at 1.25%. Those deals have disappeared entirely.
At 2.50% the same mortgage will cost about £1,122 per month or an increase of £152 per month.
At 3.50% it costs £1,252 per month or an increase of £282 per month.
The figures above are calculated at the BoE base rate. As far as I can tell, current mortgage deals are running at about 1.5% – 2.0% above the base rate
So, at say 5.0%, the monthly payment increases to £1,315, or £345 extra per month or £4,140 which is 38% higher than that quoted in the article.
Where I am, a £250k mortgage buys you a 2 bedroom flat. A modest starter home will cost at least £325,000 and a proper semi-detached family home starts at perhaps £400,000.
Running the calculation on a mortgage of say £350,000 going from a 2 year fixed rate of 1.25% to a new fixed rate of 5.0% increases the monthly payment by £640 or an annual figure of just under £7,700.
Then we have lending criteria to consider…
A mortgage of £350,000 was easily possible to achieve on two salaries totalling about £78,000 assuming a 4.5 times earnings ratio.
This earnings ratio has also vanished. So what happens now? Well, they wont be able to remortgage unless these people get significant pay rises they will be stuck on a variable rate.
A quick search shows that this is likely to be at 6% or above and require an LTV of no more than 75%.
At 6% the monthly increase is £830 or just under £10,000 yearly.
The government with the assistance of the Bank of England has been printing money since 2012 in the form of Quantitive Easing. Most of that extra money has ended up either in offshore bank accounts or in the hands of corporations.
This extra money has been one of the root causes of our current inflation.
It is now time to pay for all of that supposedly free money.
And guess what – it’s not going to be the “offshore rich” or the corporations who will be footing the bill.
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