Rate Shock For Fixed-Rate Mortgage Holders
Some homeowners are going to be faced with the biggest leap in fixed rate mortgage costs known. Those people coming off two-year fixed rate deals from late 2005 are being greeted with huge increases, for example on a £150,000 loan monthly repayments are now nearly £200 higher.
The combination of five base interest rate rises between August 2006 and July 2007 and increases in lending rates above and beyond the Bank's rises are having a punishing effect on the costs of home ownership.
The current Bank of England base rate of 5.75% was reached in July this year, and was the highest since March 2001. The average two-year fixed rate mortgage rate was 4.6% in late 2005, but it is now 6.13% - an increase of a third in borrowing costs. In the same period average family incomes have gone up by only 8%.
The financial industry is still in trouble after the sub-prime crisis spread across the Atlantic from the US. Rumours abound about which bank might be next to follow a similar route to Northern Rock. Banks are increasing borrowing costs to bolster their earnings.
Economist with Deutsche Bank, George Buckley, said: "This is going to be the largest repayment shock on record. When people come to refinance their mortgages they are going to have to pay a lot more than the last time they fixed their mortgage rates. This comes at a particularly bad time for consumers. Taxes have gone up, confidence has fallen, and people are having to think about putting more money away for their pensions. Growth in incomes is also weak. It looks unlikely that today's rates are going to fall quickly. And even if the Bank cuts official interest rates, it may take some time for mortgage rates to follow.”
Banks stopped lending to each other in the wake of the sub-prime crisis in the US and the credit crunch came into being. In the period since then the US Federal Reserve has cut 0.75% of its interest rate to help deal with the crisis, while the Bank of England has left its base rate at 5.75% since July.
Banks have increased the cost of credit in all areas: mortgages, loans and overdrafts. For example average overdraft charge rates have went up to 17.6% in October, their highest level since August 2001.
The housing market is starting to stall under these pressures, and in many areas property has started to fall in value. It is expected that the housing market will now weaken sharply as a result of the high interest rates, high values, high private debt and the credit squeeze.
At the same time, the number of loans being turned down by lenders is increasing, and some providers are getting out of the UK entirely. Personal loan acceptances have gone down every month since April, when 67% of loans were approved. In October just 52% were approved. For credit cards 17% more applications were denied from March to September than in the previous six months.
Thirty-two loan providers have raised their rates since the base rate last went up in July, with rates up to 3% higher.
Published on November 14, 2007
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