An Interest Rate Rise Will Leave 3M People Struggling With Mortgage Repayments, What Can Be Done?

Over the last couple of years, many homeowners have enjoyed the benefit of record low interest rates. The Bank of England has kept the Base rate at 0.5 per cent for over two years and this has resulted in reduced mortgage repayments for many households. However, with interest rates set to rise, many homeowners are facing an uncertain time with experts concerned about the impact that rising mortgage repayments will have on the UK economy.

Many experts have serious concerns about mortgage affordability in the UK. The Financial Services Authority's guidelines for affordability state that 'a mortgage is affordable if its level and terms allow the consumer to meet current and future payment obligations in full, without recourse to further debt relief or rescheduling, avoiding accumulation of arrears while allowing an acceptable level of consumption'.

Statistics released by the Council of Mortgage Lenders (CML), a group representing nearly all of home loan lenders in the UK, shows that an increase in the cost of borrowing of 2% would result in 2.9 million homeowners struggling to pay their mortgages.

This has caused many homeowners to look at remortgage deals in order to try to reduce their monthly outlay on mortgage repayments, as they continue to try and steer away from 'tipping point'. With fuel prices now at just under 1.50 per litre, and energy costs skyrocketing, there appears to be no other option.

A sizeable number of worried homeowners have looked to fixed rate deals, but the majority who have looked into the rates have discovered an additional headache rather than finding a solution. Owing to the popularity of fixed rate deals, especially since the start of this year, many mortgage lenders have raised the rate on these products, accordingly.

Heightened anticipation of a hike in interest rates has led to a rapid shift in fixed rate mortgage pricing, says David Hollingworth, from London and Country, the mortgage broker. "Lender after lender has moved to increase its rates, often on more than one occasion."

He added: "Borrowers hoping to access fixed deal to protect against rising rates will find that they've missed out on the lowest mortgage rates, although the products still look good in historical terms."

Recent data shows that the cost of the average five year fixed rate mortgage in the UK has increased by 0.33 per cent since January 2011. The average five year deal is now at 5.66 per cent, which, on a £150,000 interest only mortgage, represents a £41.25 hike in monthly repayment compared to January's best deals.

As the demand for remortgages increases, lenders look set to continue increasing the cost of fixed rate deals. CML figures showed that remortgage approvals increased by 16 per cent between February and March 2011.

If you're considering fixing your mortgage then it may be better to act sooner than later. A wise course of action is to speak to an independent mortgage broker who can scour the market to find the best fixed rate deals. With interest rates set to rise, however, it could be that fixed rates are also set to increase over the next few months.


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Timothy Frodsham writes for JustRemortgages.com one of the UK's top sites for the latest remortgage rates and best remortgage deals.