The Confederation of British Industry has predicted that higher-than-expected inflation will force the Bank of England to raise rates as early as the Spring and that rates could rise by 2.25 percentage points – to almost six times the current rate – by 2012.
With mortgage rates set to follow, this could have dire consequences for the 7m home owners who currently have variable-rate home loans.
According to the Council of Mortgage Lenders (CML), about 2.9m home owners would have mortgages that are no longer deemed “affordable” according to guidelines set down by the City watchdog, the Financial Services Authority.
An interest rate rise of 2 percentage points would push up the cost of a £150,000 interest-only mortgage by £250 a month.
Mark Harris, a director of Savills, the mortgage broker, said home owners should be reassessing mortgage options. “There is now far more choice and better value in the remortgage market, particularly for those looking to secure a five-year deal,” he said. “Those waiting could find they have fewer options a few months down the line. Not only could the price of fixed-rate deals rise, but if you have less equity in your home as a result of price falls you may not be able to secure the most competitive rate.”
Melanie Bien, a director of Private Finance, the broker, said: “While no one knows for sure when interest rates will rise, the reality is that it will happen at some point so a wise borrower should be prepared. Look at your own circumstances: if rates were to rise, could you afford the mortgage? If not, then you should consider a fixed rate. They are unlikely to get any cheaper; indeed, as a rate rise looks more likely, fixes will become more expensive.
“If you are enjoying a cheap SVR [standard variable rate] you can always reserve a fixed rate to move on to in the future. Some lenders will let you reserve a rate for up to six months before you actually take it out.
“If you have a high LTV [loan to value], so remortgaging is difficult, speak to your lender. Many have special deals available for existing customers.” These, she said, may not be as competitively priced as the current “best buys” but will at least provide the peace of mind that monthly mortgage payments will be fixed.
A spokesman for the CML said the FSA’s affordability tests were a “notional test” and many people who breached these guidelines would in practice still be able to repay their mortgage.
