It's not a return to the 1990s - but things could get worse

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The Independent Online

Millions of homeowners are certainly going to feel the pinch when their cheap fixed-rate mortgages come to an end over the coming months. With interest rates now some 1.25 percentage points higher than they were when people took out fixed-rate mortgages two years ago, borrowers will suddenly find themselves being forced to pay as much as 25 per cent more interest on their loans than they were.

But talk of an imminent housing crash is over-cooked. Twenty- five per cent more interest is not necessarily the same as a 25 per cent increase in your monthly repayments. More than two-thirds of all new mortgages taken out over the past few years have been repayment loans - where borrowers are paying off a proportion of their capital each month, as well as the interest. For these people, the increase in their monthly payments will be much more manageable.

When the market crashed in the early 1990s, some 80 per cent of borrowers had interest-only loans - so as rates went through the roof, people's monthly payments increased at the same rate.

Economically, Britain is also much more stable today than it was 15 years ago. GDP is growing ahead of trend, unemployment is low and the early signs are that inflation is finally beginning to respond to the string of recent interest rate rises - heading back towards its target of 2 per cent. Things were very different at the start of the 1990s, and economic conditions will have to deteriorate significantly before we can expect the same kind of housing crash as we saw then.

But homeowners should not get complacent yet. It is still perfectly possible that one or two more rate rises will follow before the cycle reaches its peak, and this may be enough to tip a few more towards the financial brink. Furthermore, the amount of money that people are borrowing via personal loans and credit cards is much higher than it was 15 years ago - and these are financial commitments which cannot simply be shaken off should homeowners need to tighten their belts to make way for more expensive mortgages.

Those who are desperate to get on the ladder today should think very carefully about whether they could afford their mortgage if interest rates were 1 or 2 percentage points higher than they are now. Furthermore, while interest-only mortgages may be many first-time buyers' only chance of affording a property, it is worth remembering that a subsequent fall in house prices could leave you with a loan that is much bigger than the value of your property. Even if you can afford to keep up repayments, you could find yourself being forced to live in the same small flat for many more years than you wanted to.

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