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August 2014 Newsletter – Think Tank Warns Borrowers

August 12th, 2014 | No Comments | Posted in Monthly Newsletters

TMS
Think Tank Warns Borrowers
A recent report from think-tank, The Resolution Foundation, has outlined the significance that rising rates could have on borrowers. Although the last few years for many may have been relatively stress free, with borrowers coasting on record low rates, it seems complacency going forward could be dangerous.
The report presents some potentially alarming figures that could equate to some troubling scenarios. The following scenarios are based on the assumption that the Bank of England base rate will approach 3 per cent by 2018.

  • The number of highly geared mortgage holders spending more than one third of their income on repayments could more than double from 1.1 million to 2.3 million by 2018, a ratio of one in four mortgaged households.
  • The number of households in the more severe situation of debit peril, who are spending over half of their income on all forms of debt repayment could increase from 0.6 million to 1.1 million.

The report also highlights the importance of conducting a financial MOT prior to a base rate rise and to consider how an individual’s repayments would go up in the light of different plausible interest rate increases.
To demonstrate the importance of such an exercise, The Resolution Foundation presented the impact a potential rate rise could have on a 25 year mortgage of £150,000.

Rate Payment Annual payment Annual change
3.2 per cent
(current average mortgage rate)
£727 £8724 £0
3.7 per cent £767 £9204 £480
4.7 per cent £851 £10212 £1488
5.7 per cent £939 £11268 £2544

 

Although the report includes a lot of ifs, buts and maybes, undoubtedly the overall message is one that cannot be overlooked. Those who are currently struggling to pay their mortgage, coming to the end of their mortgage term or on their lenders standard variable rate should certainly consider their options going forward.

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