‘Everyone is on the alert’: Mortgage lenders fear interest rate hikes in UK | Mortgages
Tthe era of ultra-cheap mortgages is apparently coming to an end as lenders withdraw their cheapest offers for a base rate hike from the Bank of England. But for thousands of borrowers, it never started. More than a decade after the financial crisis, these homeowners remain trapped paying far above average interest rates and unable to move to a cheaper deal.
With forecasts of a base rate hike before the end of winter and a rise in other costs of living, many of these households – known as mortgage prisoners – are worried about how which they will pay their monthly bills.
âEveryone is extremely concerned about the rate hike,â says Rachel Neale of the UK Mortgage Prisoners campaign group. âThese people are already in trouble. Some use food banks, others face repossession. “
A price war between lenders meant that until recently it was possible to lock in for five years at less than 1% if you had enough equity, when the average 10-year fixed rate had fallen to only 2.36%.
In contrast, those who are stuck on Standard Variable Rates (SVRs) typically pay a rate of around 4.39%. Earlier this year, MPs voted against an SVR cap that would have limited the amount lenders could charge at a rate of two percentage points above the base rate, which would have meant a current rate of pay 2.1%.
An increase in the base rate from 0.1% to 0.25% in December or January has been widely expected, which would add around Â£ 12 per month to a mortgage of Â£ 150,000. If the base rate rises to 1% and lenders’ SVRs follow suit, the typical monthly bill for a home loan for the same property would go up by Â£ 71.
Around 250,000 borrowers were thought to be mortgage prisoners, but earlier this year the city’s regulator, the Financial Conduct Authority (FCA), said it thought that figure was an underestimate.
Many initially took out their home loans from lenders who had to be rescued during the financial crisis, including Northern Rock and Bradford & Bingley, and have since seen their mortgages sold to another provider.
Most providers are âinactive,â which means they don’t offer new mortgages for people to switch to. Problems such as negative equity, an interest-only mortgage, missed payments or changed circumstances have kept people from switching lenders despite FCA interventions.
In addition to not offering new deals, inactive lenders typically charge higher SVRs than traditional lenders.
Paying a much higher interest rate than what is available in the open market isn’t just frustrating – it ripples through the rest of people’s finances.
âIt’s not just the mortgage that’s the problem: people aren’t able to put money aside for pensions,â says Neale. “When they go to another type of lender, the fact that they’re with an inactive lender creates a dark cloud over them – they’re with a debt collector, basically.”
Neale and some of the other group members have helped over 100 renegotiate with their lenders over the past year, including a case where a desperate borrower went from a 4.79% rate to 1.55%. .
But they say more needs to be done to help the group and that the Treasury has let them down by allowing lenders to buy their mortgages without guaranteeing the amount they will be charged.
Marc Jelfs and his partner are among those who have not been able to take advantage of historically low interest rates and are worried about what will happen to their payments when the Bank decides to act.
They took out a mortgage with Northern Rock in 2004. Back then it was possible to ‘self certify’ – where, instead of providing proof of your income, you just had to indicate what it was on the application form – and, as Marc was self-employed, they took that option.
In November 2007, they were ready to move on to a new deal with the bank when it was pulled – then the credit crunch hit. âWe went from 6.5% to 7%. My monthly payment was Â£ 1,100 with interest only, âsays Marc. “It went on for three years and I got into debt with my visa.”
The family’s mortgage ended up with the bank bailed out and then sold to a company called Cerberus, which bought out the mortgages of the bankrupt lenders. Despite guarantees that they would be able to upgrade to better deals after the sale, borrowers like Marc found they were unable to move and got stuck on the lender’s SVR.
âI’m paying 4.18% now, which includes a 0.25% discount because I’ve been a good customer,â he says. âIt’s Â£ 682 a month in interest and we have eight years left on our mortgage. After that, my house will be taken away from me.
The rate is variable and subject to change at the discretion of the lender, and Marc is concerned about an increase in the monthly cost.
The house originally cost Â£ 110,000 and the family spent Â£ 50,000 on the renovation. He is now worth around Â£ 220,000 to Â£ 230,000 so they have a lot of equity but their damaged credit record has so far meant that they have been told not to even bother to apply for a loan.
âWe will have spent Â£ 280,000 on interest by the end of the mortgage and we will still owe Â£ 110,000,â he says. âMy partner doesn’t even talk about it. She can’t believe that at 58 she could be homeless.
MP Seema Malhotra, co-chair of the all-party parliamentary group on mortgage prisoners, said FCA and government need to ensure borrowers can access good-value fixed interest rates to give them certainty over repayments .
âIn addition to the rising cost of living, mortgage holders are facing increases in their already high standard variable rates,â she said.
Earlier this year, the city regulator said it would review the effectiveness of the measures it has put in place to make it easier for lenders to offer loans to mortgage holders. These have given banks and building societies some flexibility when it comes to affordability assessments.
It also examines the data it holds on the number of mortgage holders and the amount they are paying. He is expected to report later in November.
A spokesperson for the Treasury said: âWe know it can be incredibly difficult not being able to change your mortgage. Many borrowers might now find it easier to switch to an active lender thanks to recent rule changes by the FCA.
“We will work with the FCA to examine the effectiveness of these changes and determine if there are other possible solutions that can be found for these borrowers that are practical and proportionate.”
How a lender helps
Many borrowers struggled to change, but one lender took mortgage prisoners and helped them get a better rate. Jonathan Westhoff, managing director of Midlands-based construction company West Brom, said when the FCA introduced new rules for activating switches, âwe just knew it was the right thing to do. – it is totally aligned with our objective â.
The company was the first to use the modified affordability tests and had to adapt its systems so that borrowers were not automatically stranded. âAlthough this is at the height of the pandemic, my colleagues have solved this problem, and we then created a dedicated team that works on the mortgage prisoner cases, because each one is different and must be looked at individually,â he says. . The company has received “a constant stream of applications” from those affected, but Westhoff says she wants to know more. âSome borrowers have saved up to Â£ 1,000 a month on their mortgage payments, which is an incredibly substantial amount, and we are certain, therefore, that there are many more we can help, âhe says. Initially, he thought borrowers were going to bigger lenders, but Westhoff says that doesn’t appear to be the case, and more needs to be done to educate people about the steps mortgage holders can take.
âWe are keen to stay close to the regulator’s review of mortgage affordability and continue to contribute wherever we can,â he said. âWe have seen, of course, the concern over the threat of rising energy costs, but in some cases the impact of being trapped in a mortgage can be more financially unfavorable in just a month. that of a dramatic increase in energy bills; and these borrowers have to deal with both.
Starting November 23, the company will offer mortgage holders a two-year fixed rate agreement starting at 2.19% for borrowing up to 75% of the loan value, rising to 2.59% on loans. at 85% – both rates well below the SVR they are likely to pay. The offers have a fee of Â£ 499, but come with a free evaluation and help with legal fees.
Westhoff adds, âWe’re also just a midsize lender, and when we first launched these products, we were clear that there isn’t much we can do because of our size, and it will take a industry-wide response to be able to help more borrowers. That said, we have significantly reduced the monthly payments for many borrowers who were trapped in mortgages, and we encourage anyone in the same situation to contact us. “