The majority of borrowers are well placed to withstand a larger-than-expected hike in interest rates, research has suggested. Speculation has bee
The majority of borrowers are well placed to withstand a larger-than-expected hike in interest rates, research has suggested.
Speculation has been mounting in recent months that the Bank of England could soon raise the base rate – currently at a record low of 0.25 per cent – with some commentators predicting an increase as early as August.
Analysis by UK Finance – the new trade body that incorporates the Council of Mortgage Lenders – suggested that if rates do rise, most borrowers will be able to take it in their stride.
Many will not see feel any immediate impact, as more than half of all outstanding regulated loans are fixed-rate products, meaning repayments will not change in the event of a rate increase.
Although around half of the 4.2m regulated mortgage borrowers on fixed rates will come to the end of their deal this year or next, many could refinance on to new low-rate deals at or before the end of their term.
Half of the fixed-rate mortgages due to expire and move to a reversion rate by the end of 2018 have better than 60 per cent loan-to-value (LTV), meaning borrowers would meet the LTV criteria for the best new deal rates.
Meanwhile, those on standard variable rates – 3.9m borrowers, according to UK Finance’s Regulated Market Survey – typically have lower debt levels, as the loans were taken out when house prices were lower.
The 1.4m borrowers currently on tracker rate deals have higher average balances, but the average interest rate on these products – 1.73 per cent – is considerably below typical rates for any other rate type.
As a result, both SVR and tracker rate borrowers tend to have lower repayment rates. Average monthly payments are currently £525 for an SVR customer, £566 for a borrower on a tracker rate and £741 for borrowers on fixed rates.
Following the Financial Conduct Authority’s Mortgage Market Review in 2014, lenders have been required to conduct tougher affordability tests on new mortgages to ensure borrowers can cope with future rate rises.
Some 92 per cent of mortgages lent since 2015 have been stress tested for an interest rate at least 3 per cent above their current level, including 84 per cent of recent borrowers now on SVR.
UK Finance described the figures as ‘encouraging’ but pointed out that a rise in rates would also affect other borrowing, with no data available on how consumers’ finances had changed since they took out their mortgages.
But Martin Stewart, director at London Money, said the country was ill-prepared for a rise in interest rates and warned that people are living “very close to the wire”.
“The level of savings in the UK is derisory,” he commented. “We have seen many bank statements and very few that have wriggle room at the end of the month. Most people have borrowed up to the max, with no obvious thought about what may happen in future.”