Downgrade in Britain's credit rating could prove expensive for mortgage holders

Mortgage rates could rise dramatically if Britain loses its prized AAA credit rating, experts are warning.

Last week, UK government debt was put on "negative outlook" by the credit ratings agency Moody's, giving it a 30 per cent chance of a downgrade within the next 18 months.

Such a downgrade could not only hit Britain's prestige, but also the pockets of millions of mortgage holders.

Ray Boulger, the technical director of broker John Charcol, says: "Any downgrade could push up the rate that the Government has to pay in order to borrow, and if this happens then this should filter through to banks' borrowing costs and ultimately what you pay when it comes time to remortgage."

This is despite suggestions by many City analysts that the Bank of England base rate, which is currently at 0.5 per cent, will stay at historic low levels for potentially years to come.

It is also by no means certain that a downgrade will actually push up the government's borrowing costs.

"It's a bit of an anomaly, but since the United States lost its AAA credit rating the cost of its borrowing instead of going up has actually fallen 50 basis points," Mr Boulger says.

David Black, a banking analyst at the financial information provider Defaqto, is urging consumers to take steps now to protect themselves.

"No one is certain as to what will happen with the credit rating and how this could impact personal finances; so try and pay off expensive debt, review your existing arrangements, and if you have a reasonable level of savings and a mortgage and are a higher-rate tax payer, look at the possibility of an offset mortgage," he says.

But it's not just mortgage rates that consumers would have to worry about if there was ultimately a downgrade of Britain's credit rating.

"Any increase in government borrowing costs or the pressure of a potential downgrade is likely to lead to higher personal taxes," Mr Black says.

"After all, the Government will need to fill its black hole and crucially show foreign investors that it is serious about getting the deficit down."

There could, though, be better news for people looking to convert their pension pots into an annuity – an income for life – from a UK downgrade.

It could potentially reverse some of the damage wrought to annuities by the Bank of England's programme of quantitative easing (QE).

"It's been pretty much bad news for annuity savers for the past few years, made worse by QE," says Tom McPhail, Hargreaves Lansdown's head of pensions research.

"If government borrowing costs did rise again, then on the surface it's likely that annuity rates will all also increase, meaning finally people will be getting more for their pension pot."

However, a severe deterioration of the UK Government's credit position could have the opposite effect.

Mr McPhail warns: "If things get really bad, pension funds could be forced to move away from UK gilts altogether into even lower-yielding – but safer – investments, which could mean rates continue to fall long term."

Meanwhile, many interest-only borrowers are facing a nervous wait to see if they will be allowed to remortgage or even stay on their existing deals.

Lloyds customers have been told they will have to provide proof they have an investment vehicle in place capable of repaying the capital on their mortgage.

"Outside of the long-term, fixed-rate mortgage market, things are tightening up and getting more expensive for mortgage borrowers," Mr Boulger says.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at

Suggested Topics
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Digital Optimisation Executive - Marketing

    £30000 - £35000 per annum: Recruitment Genius: The UK's fastest growing, multi...

    Recruitment Genius: Financial Reporting Manager

    £70000 - £90000 per annum: Recruitment Genius: A Financial Reporting Manager i...

    Recruitment Genius: Payments Operations Assistant

    £23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...

    Recruitment Genius: Telephone Debt Negotiator

    £13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...

    Day In a Page

    Sepp Blatter resignation: The beginning of Fifa's long road to reform?

    Does Blatter's departure mean Fifa will automatically clean up its act?

    Don't bet on it, says Tom Peck
    Charles Kennedy: The baby of the House who grew into a Lib Dem giant

    The baby of the House who grew into a Lib Dem giant

    Charles Kennedy was consistently a man of the centre-left, dedicated to social justice, but was also a champion of liberty and an opponent of the nanny-state, says Baroness Williams
    Syria civil war: The harrowing testament of a five-year-old victim of this endless conflict

    The harrowing testament of a five-year-old victim of Syria's endless civil war

    Sahar Qanbar lost her mother and brother as civilians and government soldiers fought side by side after being surrounded by brutal Islamist fighters. Robert Fisk visited her
    The future of songwriting: How streaming is changing everything we know about making music

    The future of songwriting

    How streaming is changing everything we know about making music
    William Shemin and Henry Johnson: Jewish and black soldiers receive World War I Medal of Honor amid claims of discrimination

    Recognition at long last

    Jewish and black soldiers who fought in WWI finally receive medals after claims of discrimination
    Beating obesity: The new pacemaker which helps over-eaters

    Beating obesity

    The new pacemaker which helps over-eaters
    9 best women's festival waterproofs

    Ready for rain: 9 best women's festival waterproofs

    These are the macs to keep your denim dry and your hair frizz-free(ish)
    Cycling World Hour Record: Nervous Sir Bradley Wiggins ready for pain as he prepares to go distance

    Wiggins worried

    Nervous Sir Bradley ready for pain as he prepares to attempt cycling's World Hour Record
    Liverpool close in on Milner signing

    Liverpool close in on Milner signing

    Reds baulk at Christian Benteke £32.5m release clause
    On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

    On your feet!

    Spending half the day standing 'reduces risk of heart attacks and cancer'
    With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

    The big NHS question

    Why are there so few new GPs when so many want to study medicine?
    Big knickers are back: Thongs ain't what they used to be

    Thongs ain't what they used to be

    Big knickers are back
    Thurston Moore interview

    Thurston Moore interview

    On living in London, Sonic Youth and musical memoirs
    In full bloom

    In full bloom

    Floral print womenswear
    From leading man to Elephant Man, Bradley Cooper is terrific

    From leading man to Elephant Man

    Bradley Cooper is terrific