Homeowners face mortgage rate shocks

Three out of four homeowners (70%) face significant jumps in monthly mortgage repayments when their fixed-rate deals expire, according to a study by personal finance website Fool.co.uk.

Nine out ten borrowers are currently on special-rate mortgage deals
Borrowers face a jump in mortgage rates from 4.8% to 6.3%
One in twenty (5%) homeowners intend to sell up and rent

The study also reveals that nine out of ten homeowners (91%) are paying interest at around 4.8% on fixed-rate or special mortgage deals. Two-thirds (65%) took out deals two years ago, and one in six (17%) fixed their special deals three years ago.

How low did rates go?

Interest rates for four out of ten mortgages (38%) were fixed between 4.5% and 5%, and one in five loans (21%) were set at 5.0% and 5.5%. One in six homeowners (18%) secured their special deals at 4.0% to 4.5%.

However, as some 1.4 million fixed-rate deals come to an end over the coming months, homeowners face considerably higher mortgage repayments. Apart from borrowers on fixed-rate mortgages, homeowners on discounted, tracker and capped-rate mortgages could face significant hikes too.

The low-rate party comes to an end

Four in ten people (41%) have been offered standard variable rate mortgages between 6% and 7%, and one in four (29%) have been told that their repayments will be calculated at 7% to 7.5%. The average standard variable rate is 6.3% - 1% higher than the Bank of England base rate.

On a typical 25-year repayment mortgage of £200,000 fixed at 4.8%, monthly repayments are £1,146. But every 1% rise in rates will increase repayments by around £120. Borrowers who have been offered a standard variable rate mortgage at 6.3% can expect monthly repayments to jump £180 to £1,326.

As a result of higher repayments, one in 20 borrowers (5%) intend to sell up and rent, and a similar proportion (5%) plans to pay off their loan over a longer period. One in 25 (4%) will take on extra jobs, and a third (33%) hope to move to other lenders.

David Kuo, Head of Personal Finance at Fool.co.uk, says: “Many homeowners will feel the full force of the credit crunch when their special-rate mortgage deals come to an end. For a lucky few, another good deal will be just around the corner.

“However, a significant number of homeowners will find that the myriad of choices that were once available has shrunk to no choice, as lenders limit their best deals to their preferred clients. But homeowners can lessen the shock by taking avoiding action now.

“Paying more than the amount your lender has stipulated while your special rate deal is still in place will chip away at the loan. And by getting your finances in order, lenders will be beating a path to your door rather than beating down your door.”