The Bank of England sounded caution today stating that millions of households may see their monthly payments rise in 2011 on the back of higher tracker mortgage rates.
This is bad news for families who are already struggling to keep pace with their expenses. Data suggests that two-thirds of total 12 million mortgages – approximately 8 million households have borrowed on tracker rates. This effectively means that mortgage rates will jump immediately whenever the Central Bank hikes its base rates, currently set at 0.5 percent.
A back of the envelope calculation shows that if base rates go up to 1 percent from the current 0.5 percent, an average £150,000 mortgage repayment will be up by £43 a month or £516 annually.
When the borrowing rates had hit rock bottom, many families switched to variable rates when the tenor of their fixed rates expired. “This exposes more households to the risk of increases in interest rates”, the worried Central Bank said today.
However, the increased rates are not all bad news. The Central Bank is trying to control the recent spiraling inflation, which already has households reeling. For new home buyers, this may be good news, since prices are due to decrease even more once lending rates go up. Unfortunately, people planning to sell their homes may have to wait a little longer; prices are already down by more than 17 percent from their peak in 2007.
However, a few factors will continue to worry such as an increased VAT and a cut in government spending, causing job losses. The inflation should come down once rates are hiked, giving some reprieve to the struggling middle class.
Jonathan Loynes, chief economist at Capital Economics thinks “A relatively small increase in interest rates could have a fairly sizeable impact on the housing market at a time when the market is already pretty weak”. He adds that home prices are overvalued by at least 20 percent and the correction will happen once lending rates are revised.
“People got complacent and started to feel that it was normal for rates to be so low. All that can happen is that interest rates will increase”, summed up David Hollingworth, a specialist at the Bath-based mortgage broker London & County.