The Bank of England has raised the base rate nine consecutive times, taking the rate from 0.1% to 3.5% at the time of writing. In this article we will cover how the rise in interest rates is affecting mortgage holders. We will explore the different ways in which lenders can help their existing customers, as well as how lenders can prepare for new business.
This is the highest rate since 2008, and is expected to increase further to at least 4% in the next year to counter high inflation (10%+).
In this article we will cover how the rise in interest rates is affecting mortgage holders. We will explore the different ways in which lenders can help their existing customers, as well as how lenders can prepare for new business.
First, some background: Interest rates had been historically low prior to 2022, following the finanical crisis in 2007/2008 and the COVID-19 pandemic emergency measures in 2020. However, inflation rates are significantly above the Bank’s target, pushing the UK economy towards a recession, and resulting in continual base rate increases.
Mortgage holders are expected to see rises in their interest rates and monthly payments as a consequence of the base rate increases.
Figures from the Bank of England show that there have been year-on-year increases in the number of fixed rate mortgage deals, with c.50% of active mortgages in 2022 being on a 5-year fixed deal. As such the impact of the increased repayments is expected to be gradual, phasing in as deals expire.
A customer on a 5-year fixed rate of 2.5% on a 25-year £175,000 mortgage has an existing mortgage repayment amount of £785. If they are about to come off this deal and onto a variable rate of 5.5%, the repayment amount would increase by £234 (+ 30%) to £1,019. The Bank of England has estimated around four million households will face an increase within the next year, with the average mortgage payment raising by £250.
Mortgage holders are typically considered lower risk, as they will have undergone vigorous affordability checks in order to be approved for the mortgage in the first place. They are more resilient than the average consumer and are likely to have higher incomes and financial associates to share the burden with, therefore suppressing the impact of rising repayments. For the above example, a joint mortgage would result in each individual paying an extra £117 a month.
Lenders should consider how the rising interest rates affect both new and existing customers. A key priority should be the affordability assessment and continuing to lend responsibly. The type of lender will determine what actions can be taken, with unsecured lenders having to consider mortgage holders vs non-mortgage holders, and secured lenders having to provide a range of options to support customers with payment difficulties. This month the FCA published draft guidance to firms on this subject.
For New Business some of the possible measures are to:
For Existing Customers possible actions to take as a result of increasing stress on mortgage holders are to:
Vestigo have recently been working with a number of lenders to help them understand the impact of this changing environment and support them to adapt their strategies to ensure responsible lending. Although the full effect of the rise in rates is expected to be gradual as customers come off fixed rate deals, it is vital for lenders to prepare for this and support customers who have been affected.
If you are interested in finding out how Vestigo could help your business, please get in touch.
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