No rate change - but fix-rate borrowers still need to plan ahead

The Council of Mortgage Lenders welcomes today's Bank of England MPC decision to hold rates.

Even so, the CML urges borrowers who will be coming to the end of fixed-rate deals in 2007 or 2008 to plan ahead for the higher payments they will almost certainly face.
Using data from its regulated mortgage survey, the CML estimates that about 1.3 million borrowers took out fixed-rate mortgages in 2005, and a further 1.5 million in 2006. Most, but not all, of these mortgages would have been fixed for two years.

The majority of these borrowers will face increases of between 0.75% and 1.5% on their mortgage rates.

The CML calculates that the average two-year fixed-rate borrower coming to the end of their fix later this year originally had a mortgage of around £114,000. On a repayment mortgage taken out at 4.6% (the average two-year fixed rate at the interest rate trough of September 2005), this would result in a rise of about £102 a month (from £640 to £742), for a borrower whose new rate is 1.5% higher. On an interest-only basis the rise is more dramatic, at £143 - although the monthly payment remains much lower in absolute terms than for a repayment borrower, rising from £437 to £580. Most borrowers did not fix at such low rates, and so will not see their payments rise by as much as this.

We largely expect that borrowers will be able to absorb the higher payments. Many people's earnings will have risen since they took out the mortgage, while some may take advantage of the financial leeway offered by switching temporarily to interest-only. Most borrowers facing higher payments will also have accumumulated a significant cushion of housing equity by virtue of house price inflation since they took out their mortgage.

Michael Coogan, CML Director General, commented: "While today's decision not to raise rates is welcome, there is no cause for complacency. More than two million borrowers over the next year and a half will reach the end of fixed-rate deals, and will face the prospect of higher mortgage payments.

"For most people, the scale of the increase will be manageable. But it makes sense for borrowers whose fixed-rates will end soon to start planning ahead now, and to recognise that their monthly costs will be higher in the future. Anyone who thinks they may face financial difficulties should talk to their lender at an early stage to see what steps can be taken to improve their situation."