As mortgage rates are slowly edging upwards, there are increasing fears of borrowers being trapped in a cycle of unaffordable repayments. In fact, according to research from think tank Resolution Foundation, one in ten of today's mortgage holders are at risk…
The study identified two groups of mortgage holders that could potentially suffer from rising interest rates in the future. These were categorised as:
Currently, the affordability issue is highest among the lowest-income households, with 25% of those spending more than a third of their income on mortgage repayments being in the bottom tenth of income distribution.
But, when interest rates rise, affordability will become a wider problem, and it'll go higher up the ladder too – by 2018, only 15% of those spending a third of their income on repayments are expected to be in the lower tenth of the income profile, indicating those on higher wages will start to feel the pinch too.
The threat of rising interest rates is particularly concerning for so-called "mortgage prisoners" who aren't able to switch to a better deal. Perhaps because they have very low equity, a poor credit rating, are self-employed or have an interest-only mortgage, they could find it harder to remortgage to a cheaper deal and will instead be left paying their current lender's standard variable rate, thereby leaving them fully exposed to any change in base rate.
These fears could be exacerbated by latest figures revealing that the level of mortgage lending is continuing to rise. In its April report, the Council of Mortgage Lenders (CML) showed that gross mortgage lending totalled £16.6 billion over the month – up 8% on March's lending figure and 36% higher than April 2013 (£12.2 billion), as well as being the highest total for April since 2008.
However, as CML economist Bob Pannell points out, the figures are difficult to interpret given the recent implementation of the Mortgage Market Review (MMR), with there potentially being "some disruption to the monthly pattern of activity while MMR procedures bed down" – the figure could be lower when the MMR impacts the number of mortgage approvals and, therefore, the number of mortgages advanced, over the next few months.
In the long term, however, it's hoped that the tighter rules following the MMR will make concerns over affordability less pressing. Borrowers will be required to meet increasingly strict lending criteria and will need to pass "stress tests" to ensure they could handle a rate rise in the future, which ideally means fewer borrowers will be trapped in the cycle of unaffordable repayments.
In the meantime, if you're looking to borrow and are concerned over the future impact of a rate rise, there are several things you can do. The first would be to save up as big a deposit as you can manage – the smaller the mortgage the lower your monthly repayments will be, and being able to stump up a deposit of 20% of a property's value (for example) will give you a far better rate than if you only had 5% to put down.
Then it's all about finding the best mortgage to suit your needs, and although rates are starting to edge up there are still some good deals to be found for those that meet the criteria. Make sure to compare the options and see if you can secure the rate that will keep your repayments low for as long as possible.
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