Rocketing interest rates could add more than £13billion to household mortgage bills by the end of next year, according to new analysis conducted for The Mail on Sunday.
The staggering extra cost threatens to tear another hole in household budgets at a time when many families are struggling due to the cost-of-living crisis.
The Bank of England raised interest rates by 0.5 percentage points to 2.25 per cent on the day before the Chancellor’s mini-Budget, which was delivered nine days ago.
Staggering: Rocketing interest rates could add more than £13billion to household mortgage bills by the end of next year
Huw Pill, the Bank’s chief economist, warned last week that further significant increases are in the pipeline in an attempt to bring down soaring inflation.
Financial markets are expecting the base rate to rise as high as 6 per cent next year. Many lenders are currently charging about 4 per cent on two-year fixed deals.
There are growing concerns that a wave of mortgage defaults could hit house prices and leave banks and building societies with rapidly rising bad debts on their balance sheets.
An estimated 2.1million fixed-rate mortgage deals will expire between now and the end of next year.
Those borrowers will almost certainly be faced with much higher repayments when their existing fixes come to an end.
Forecasts suggest that a typical homebuyer will have to pay hundreds of pounds more per month. Many families with overstretched finances will run into difficulty and some of those will undoubtedly be forced to default. The impact could amount to £13billion in additional repayments based on a £150,000 two-year fixed-rate mortgage.
The biggest mortgage lenders are Lloyds – which also owns Halifax – along with NatWest, Nationwide, Santander and Barclays.
You can check what fixed rate mortgage deals you could be offered and how much they would cost based on your mortgage size, home value and how long you want to fix for with our best mortgage rates calculator, powered by L&C.
Andrew Montlake, of mortgage broker Coreco, warned that rising rates will mean an ‘increase in potential repossessions’, which will in turn result in write-offs for banks and building societies. He said it is now an ‘inevitability’ that lenders’ bad debts will rise.
Russ Mould, investment director at stockbroker AJ Bell, said banks may have to start earmarking large sums to cover possible losses. He added: ‘It would hurt and it would affect their profits.’
Banking industry body UK Finance estimates the number of fixed-rate deals coming to an end will rise by almost 40 per cent in 2023. The sharp increase follows a surge in the number of borrowers who took advantage of Rishi Sunak’s stamp duty holiday during the pandemic.
Scott Taylor-Barr, an adviser at Carl Summers Financial Services, said borrowers have had a ‘sharp intake of breath’ when confronted with the rate rises.
He said he has advised some clients to consider delaying their retirements so they can afford higher home loan repayments.
Alice Guy, personal finance expert at Interactive Investor, described the rise in rates as ‘terrifying’. She said it could mean that the monthly repayments on a £150,000 mortgage could leap by as much as £500.
Guy who prepared the analysis for the MoS, said: ‘UK households on fixed mortgage deals could pay £13billion extra each year in mortgage costs if interest rates hit 6 per cent in 2023, as many experts are predicting.’
She added that a family with a £200,000 mortgage could end up being charged an extra £724 each month – amounting to an ‘eyewatering’ £8,688 extra per year. Last week was described as the worst for the mortgage market since the financial crisis of 2008. A record 1,000 home loan deals were withdrawn by lenders on Tuesday alone.
> See how much mortgage rate rises have added to costs
In recent times homeowners have been borrowing at rock-bottom rates. Fixed-rate deals were available at 1 per cent as recently as last year.
Analysts fear soaring repayments could cause house prices to plummet by next year.
Experts from Oxford Economics said ‘a scenario whereby house prices crash is looking increasingly likely’.
They believe homes are currently overvalued by about 30 per cent.
A former member of the Bank of England’s Monetary Policy Committee, who asked to remain anonymous, told The Mail on Sunday that one of the biggest problems facing the UK is a potential housing crisis.
He said the jumps in interest rates are going to be much more significant than the reduction in stamp duty. ‘House prices are definitely going to stop going up,’ he added.
What to do if you need a mortgage
Borrowers who need to find a mortgage because their current fixed rate deal is coming to an end, or because they have agreed a house purchase, have been urged to act but not to panic, writes This is Money editor Simon Lambert.
Banks and building societies are still lending and mortgages are still on offer with applications being accepted.
Rates are changing rapidly, however, and there is no guarantee that deals will last and not be replaced with mortgages charging higher rates.
This is Money’s best mortgage rates calculator powered by L&C can show you deals that match your mortgage and property value
What if I need to remortgage?
Borrowers should compare rates and speak to a mortgage broker and be prepared to act to secure a rate.
Anyone with a fixed rate deal ending within the next six to nine months, should look into how much it would cost them to remortgage now – and consider locking into a new deal.
Most mortgage deals allow fees to be added the loan and they are then only charged when it is taken out. By doing this, borrowers can secure a rate without paying expensive arrangement fees.
What if I am buying a home?
Those with home purchases agreed should also aim to secure rates as soon as possible, so they know exactly what their monthly payments will be.
Home buyers should beware overstretching themselves and be prepared for the possibility that house prices may fall from their current high levels, due to higher mortgage rates limiting people’s borrowing ability.
How to compare mortgage costs
The best way to compare mortgage costs and find the right deal for you is to speak to a good broker.
This is Money’s mortgage broker partner L&C told me that mortgages are still available and you can use our best mortgage rates calculator to show deals matching your home value, mortgage size, term and fixed rate needs.
Be aware that rates can change quickly, however, and so the advice is that if you need a mortgage to compare rates and then speak to a broker as soon as possible, so they can help you find the right mortgage for you.
> Check the best fixed rate mortgages you could apply for