Breathing space for those with cheap fixed rate mortgages
With interest rates having risen five times between August 2006 and July 2007 there were great concerns over how consumers on cheap fixed rate mortgages would manage when their deals came to an end. Many set to be faced with a payment shock that amounted to hundreds of pounds extra each month as a result of having to move to higher interest rates at the end of their cheap fixed rate period.
Many homeowners took out cheap fixed rate deals two or three years ago, some with interest rates of under 4.5%. Whilst these borrowers managed to avoid the immediate effects of the five interest rate rises that have hit over the past year and a half, many were set to feel the brunt of being hit with all of the interest rate rises in one go once their cheap rate expired.
In fact the Financial Services Authority had painted a very bleak picture in relation to those currently on cheap fixed rate deals that were due to end, stating that once their deals came to an end many would find it impossible to meet mortgage repayments at the higher rate of interest, and repossession levels would go through the roof.
However, there is now some breathing space for those on cheap fixed rate mortgages that are due to come to an end, and some industry officials are stating that things may not be as bad for them as originally thought. It was thought that many of these homeowners could be left looking for hundreds of pounds extra each month in order to meet rising mortgage repayments, but the Council of Mortgage Lenders said that the future does not look as bleak for these homeowner now.
One CML official stated that in some cases these homeowners may only be looking at a rise of around £30 or so a month providing they switch to another competitive deal upon expiry of their current one rather than reverting to the lender's standard variable rate.
Basing an example on a homeowner with a mortgage of £114,000 on a repayment mortgage the CML official said: "We estimate that the monthly increase for a borrower coming out of a two-year fix and choosing a new bank rate tracker will have declined from £140 in the first quarter to £39 in the fourth."
The CML also added: "The intensity of payment shock is likely to decline markedly as the year progresses. The level of shock is unlikely to be as great as the FSA suggests if borrowers choose follow-on deals rather than default to the SVR."
Interest rates have already fallen twice by 0.25% each time since December of last year, and many experts are predicting that they will fall further, so by the time some people come off their cheap fixed rate deal there may have been three or more interest rate cuts, which means that the impact of rising interest will not hit anywhere near as hard as it may have done prior to December.
Tom Smith
1st March 2008
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