Millions face becoming ‘mortgage prisoners’ as rise in interest rates could trap to 2.3m homeowners
Andrew Grice has been Political Editor of The Independent since 1998. He was previously Political Editor of The Sunday Times, where he worked for 10 years, and he has been a Westminster-based journalist since 1982. His column, Inside Politics, appears in The Independent each Saturday.
Tuesday 20 May 2014
About 2.3 million householders could become “mortgage prisoners” who struggle to afford their repayments when interest rates rise, according to a report published today.
In the first detailed study of the likely impact of rate rises, the Resolution Foundation think tank predicted that 770,000 households - one in 10 of those with mortgages - will be most at risk. They will be unable to switch to better deals to protect themselves against rate rises or will find that their monthly repayments soak up at least one third of their disposable income by 2018.
Although the Bank of England last week played down the prospect of an early increase in interest rates, City analysts expect them to start rising from April next year. Some Conservatives are nervous about the political impact of a rise before next May’s general election. Mark Carney, the Bank’s Governor, who said at the weekend that it might intervene to stop the housing market overheating, added: “We don’t want to build up another big debt overhang that is going to hurt individuals and is very much going to slow the economy in the medium term.”
The independent think tank raised the alarm about the most vulnerable 770,000 households already with mortgages, saying they were “doubly exposed”. Typically, they might have very low equity in their home (less than five per cent), might be self-employed or have an interest-only mortgage, making them less attractive to lenders. Secondly, it would take only a relatively modest rise in rates by 2018 for a third of their income to be eaten up by mortgage repayments.
Today’s report, “Mortgaged Future”, cast doubt on the so-called “golden age” for home-buyers while interest rates have remained at a record low 0.5 per cent for five years. Although a household with a £75,000 tracker mortgage has saved £12,400 since 2008, many people have missed out. Wages rose by less than inflation and some householders failed to get the full reduction in rates because they were on fixed-rate deals or because their lender did not pass on all the benefit. So the proportion of people struggling to pay their mortgage fell only slightly during this period and still stands at 1.1 million today, the foundation said.
That figure could more than double to 2.3 million households – almost one in four of the 8.4 million with mortgages - by 2018 if interest rates rise to three per cent as financial markets expect. The report said the total number at risk of becoming “mortgage prisoners” could be as high as 3.5million, but some of these will be able to negotiate new terms with their lender. However, those with low equity or interest-only mortgages will find it difficult to access new deals, the foundation feared, especially as tighter lending conditions have just been imposed following the financial crisis.
Matthew Whittaker, the Foundation’s chief economist and the report’s author, said: “Many borrowers have enjoyed spectacular savings over recent years, with mortgage rates falling to historic lows, and most will be able to ride the tide of gradually rising interest rates. But for around one in four, even modest rate rises could create financial difficulties. Those at greatest risk are members of this group who also find themselves unable to access the best deals in the market today. Almost one in 10 households are doubly exposed: facing the prospect of their mortgage becoming increasingly unaffordable in the future and with the market offering them limited, if any, choice today.”
He added: “There is still a window of opportunity to think creatively about the best way of reducing the risk to this vulnerable group while we still have ultra-low interest rates. But that era is coming to an end relatively soon and the legacy of easy credit and the associated debt-overhang will have to be reckoned with. Financial institutions and policy-makers must consider now how best to minimise the scale of the adjustment problems these families face when interest rates start to return to normal.”
According to the foundation, the current “affordability problem” is greatest among the lowest-income households. Some 25 per cent of those already spending more than a third of their income on mortgage repayments are in the bottom tenth of the income ladder.
As interest rates rise, the problem is set to spread up the income scale. By 2018, only 15 per cent of those spending a third of their income on mortgage repayments are expected to be in the lowest tenth of the income distribution.
London and the East of England are most exposed to risk. Some 35 per cent of mortgagors in these regions will spend a third of their income on repayments by 2018, compared to only 18 per cent in Scotland and 19 per cent in Yorkshire and the Humber and 22 per cent in Wales.
Northern Ireland and London are the parts of the UK where borrowers are most likely to be in the most vulnerable group – with 16 per cent and 13 per cent of mortgagors respectively projected to be both spending a third of their income in 2018 and at risk of being “mortgage prisoners” today. Northern Ireland is the region where low equity is most common – 35 per cent of mortgagors have less than five per cent equity in their home, compared to just two per cent in London.
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