Big mortgage reset: 2.6M borrowers forecast to pay thousands extra

Britain’s mortgage holders are in more pain: 2.6 million are expected to pay thousands of pounds extra annually by the end of next year as interest rates are expected to continue to rise.

City experts have warned of a “major reset of mortgages,” with only a third of borrowers with cheap temporary deals so far getting off.

Research from Capital Economics has found that 3.2 million of these households have interest rates of at least 3 percent, but this will rise to 5.8 million by the end of next year.

The average rate for a new two-year firm deal last Friday was 5.83 percent — while a five-year one was 5.48 percent, according to moneyfacts financial experts.

Market volatility has flared in recent weeks, driving mortgage rates higher, following the release of worse-than-expected inflation data last month that pushed the annual rate to 8.7 percent.

Traders are anticipating an increase in the Bank of England’s key interest rate to 5.5 percent by the end of this year. It is currently at 4.5 percent, with the next update on June 22.

That’s what a city source said The times: ‘In the next nine months there will be a major reset of mortgages. Only a third has made it through so far, two thirds are coming.’

The newspaper, which published the Capital Economics study, also cited data from mortgage broker London Money, which showed that borrowers who exit existing deals face an average increase in mortgage repayments of 26 percent.

The broker gathered the data from clients whose deals expired between March and last month and found that their average monthly repayments increased by £392 per month – from £1,474 to £1,866.

As rising interest rates and high inflation wreak havoc, Moneyfacts reported that mortgage lenders have also taken out a series of 10-year, fixed-rate contracts.

Lenders scrambled to raise the cost of 10-year deals or take them out of the market altogether, with more than 10 percent slipping since mid-May.

The rise in mortgage rates will cost borrowers £9 billion this year and next, according to the Center for Economics and Business Research.

And the Financial Conduct Authority has reported that about 116,000 borrowers will move away from fixed-rate deals this month.

Figures compiled by real estate website Rightmove showed that home loan rates rose by an average of 0.39 percent over the past week.

Five-year term deals for customers with an 85 percent down payment are up 0.47 percentage points on average over the past week to 5.02 percent.

That would add more than £600 a month to annual repayments for a typical borrower.

The average ten-year mortgage agreement is now 5.37 percent, compared to 5.08 percent on May 24. But in February, lead banks First Direct, HSBC and Lloyds were offering 10-year deals below 4 percent.

Borrowers can check what deals they can sign up for and how much it could cost them to take out a new mortgage now, using their home’s value and loan size with our best mortgage interest calculator.

David Hollingworth, associate director at broker L&C Mortgages, told BBC Radio 4’s Today programme: ‘It’s been quite brutal in recent weeks in terms of the pace of interest rate changes. And everything that has been withdrawn has largely been replaced by something higher.

“A few weeks ago you were looking at the best rates for five years, about 4 percent. Now some are hovering around 4.5 percent, but more likely 4.75 percent, and I think this week will only bring more of the same.”

He added: “We are now reaching the stage where market rates are forcing this change for lenders as borrowing costs have increased. But we also see lenders having to move because the market around them is shifting.

“So they’ll reprice rates at a level they think is right, only to find that others have shifted, which is why a tidal wave of business is coming their way.”

“They have to protect the service, and borrowers are naturally now rushing to grab a rate. We’re back in that phase where you can’t linger if you’re looking at a fixed rate.’

Last Friday, HSBC UK said it was working to increase mortgage lending capacity as it reopened its brokerage channel for a few hours.

Higher interest rates for lenders across the market resulted in significant demand for the bank’s mortgage products, and the bank made the decision Thursday afternoon to temporarily withdraw the rates available through brokerage services.

HSBC said this was to ensure the bank could stay within its operating capacity and meet customer service obligations.

Swap rates, which support the price of fixed-rate mortgages, have generally risen on expectations about inflation, and several lenders have raised their mortgage rates in recent days.

Ian Stuart, CEO of HSBC, told BBC Radio 4’s Today programme: ‘Our house view is that (interest) rates are likely to rise a little more and probably stay a little higher for longer.

‘So not the news mortgage borrowers are looking for. But I don’t think inflation will fall as far as we’d like, so I think that’s more or less inevitable.’

Speaking about whether he couldn’t see rates back to 1 percent, he said, “I don’t see that. I think interest rates will start to fall, but only when inflation is much lower than it is now.

“I’m pretty sure inflation will start to come down, but not before inflation is much lower than it is now. I’m pretty sure inflation will come down when energy prices fall again, but there’s still some pretty ingrained inflationary pressure in today’s market.

So will it meet the government’s targets by the end of the year? Don’t know. But hopefully it will start to come down, and when it does, the pressure from swap rates will ease.”

He continued, “There is no question that people really need to rethink their personal finances.

“If you have an old rate, as many will have, say 1.5 percent, and you get off that rate and go to about 5 percent, it has a big impact on your monthly budget.”

On Saturday, a Labor study claimed homeowners were hit with a ‘Tory mortgage fine’ of £7,000 a year, with interest rates three times what they were two years ago.

Pat McFadden, shadow chief secretary of the Treasury, blamed what he called the “reckless economic gamble” made by the Conservatives during the September mini-budget.

Liz Truss became the shortest-serving prime minister in modern British political history after the fallout from her and then-Chancellor Kwasi Kwarteng’s so-called growth plan that sent the value of the pound plummeting and mortgage rates soaring.

Analysis by Labor suggests the average homeowner is spending an extra £150 each week since what officials dubbed the ‘kamikaze mini-budget’ in the autumn.

It means the average household with a mortgage now pays £223 a week in mortgage interest – an increase of £7,000 a year, party officials said.

Labor said those with a loan-to-value (LTV) ratio of 75 percent in April faced average interest rates of up to 4.63 percent.

The same deal had an interest rate of 1.49 percent in April 2021, the party said — a third of what it raised to 24 months later.

In response, the Conservative Party did not refer to Labour’s criticism of mortgage rates, focusing instead on the rival party’s decision to backtrack on a £28bn green welfare plan.

Fears of a house price crash have also increased, with some realtors warning that the value could fall by as much as 20 percent over the next two years.

Graham Cox, a mortgage broker at Self-Employed Mortgage Hub, said: “A house price crash is inevitable, in my opinion.”

Rising interest rates are also taking their toll on housing construction. A monthly business survey found activity in the industry had fallen to its slowest pace since May 2020.

Excluding the impact of the pandemic, this was the worst performance in just over 14 years.

Concerns about the impact of higher interest rates and weak market conditions continued to dampen residential activity, according to the S&P Global/CIPS Purchasing Managers’ Index for May.