"Only 12 months ago, you could remortgage onto a sub-one percent fixed rate. Now, even if you have 50% equity, the best you can get is 3.49%, a 250% increase."
More than 1.4 million households in the UK are facing the prospect of interest rate rises when they renew their fixed rate mortgages in 2023, according to a new report from the ONS.
The majority of fixed rate mortgages in the UK (57%) coming up for renewal in 2023 were fixed at interest rates below 2%.
The ONS data shows that in the first quarter of this year, 353,000 fixed rate mortgages will have to be renewed. Its calculations, based on Bank of England transactions data, suggest that the number of fixed rate mortgage deals coming to an end in 2023 will peak in Q2 2023 at 371,000.
When borrowers remortgage in the near future it is likely to be at a higher rate of interest. This can be seen in the Office of Budgetary Responsibility (OBR) expectations of the future path of the Bank Rate, which is expected to peak at 4.8% by the end of 2023.
In its fiscal forecast, published in November 2022, the OBR predicted that the Bank Rate would rise from 1.6% in Q3 2022 to 4.8% in Q3 2023 and 4.5% in Q3 2024.
The additional costs facing those refixing their mortgages
The effective interest rate on outstanding mortgages with a fixed rate was 2.08% in November 2022, according to the BoE. This contrasts with an average interest rate of 4.41% on variable rate mortgages and quoted household interest rates on new fixed rate mortgages around 6%.
Should the interest rate on a £100,000 mortgage increase from 2% to 6%, assuming a 25-year capital and repayment mortgage, then the monthly mortgage repayment on the same mortgage would increase by £220 (from £424 to £644). However, assuming the same increase on a £300,000 mortgage, monthly repayments would rise by £661 (from £1,272 to £1,933).
The BoE's Financial Stability Report from December 2022 suggests that mortgagors on fixed rates set to expire by the end of 2023 are facing monthly repayment increases of around £250 upon refinancing to a new fixed rate.
The ONS' research shows that around 4 in 10 of those with a mortgage are now worried about changes in interest rates on their mortgage.
There has been a slight increase in the percentage of people surveyed who, when asked how easy or difficult it was to afford their rent or mortgage payments, said they found it somewhat difficult or very difficult, from 27% in the period 14 to 25 September 2022 to 31% in the period from 7 to 18 December 2022.
Additionally, around 4 in 10 (45%) adults with mortgages reported being very or somewhat worried about the changes in mortgage interest rates during the period 7 to 18 December 2022.
Scott Taylor-Barr, financial adviser at Shropshire-based Carl Summers Financial Services, said: "There is no doubt that many people are concerned when we sit down and look at the costs of a new mortgage deal, compared to one they are about to roll off. An increase of a few hundred pounds per month on an average mortgage is not uncommon. For many, this has led to a conversation about extending their repayment term to help manage that cost. If they were prudent when rates were low and shortened their repayment term, this is quite simple, but for those that chose to take the low rates as cash in their pocket it can be much harder. For that latter group, it is often a case of talking through their expenses and looking at what could be cancelled or reduced or even considering if they need to revisit the age at which they ideally want to retire."
Samuel Mather-Holgate of Swindon-based advisory firm, Mather & Murray Financial, commented: "Only 12 months ago, you could remortgage onto a sub-one percent fixed rate. Now, even if you have 50% equity, the best you can get is 3.49%, a 250% increase. Fix for longer than 2 years or have a smaller deposit and these rates spiral. A 5-year fixed rate with a 10% deposit will now cost you 4.89%. As the recession worsens, gilt rates are likely to increase so I expect peak mortgage pricing to be in late Spring. It's difficult to see what happens next as the Bank of England base rate will reverse in the summer, but the market will dictate government borrowing remains high as confidence in the country diminishes. Landlords are undoubtedly passing on these costs to renters and average rents are hitting people's disposable income hard. I expect a homelessness crisis come the summer."
Mitul Pandya, managing director at the Stanmore-based accountants, Charterwells, said: "For millions of small business owners, the squeeze on household finances is being exacerbated by the squeeze on their profits. They are seeing a sharp rise in their tax bills and, having recovered from the pandemic, their payments on account. This comes at the same time many have Covid loans to repay. There is less money in their business at the exact time many business owners have higher mortgage or rental costs, not to mention energy and food bills. It makes real fiscal sense for HMRC to consider offering small business owners more flexibility for their next payment on account. Helping household cash flow via tax flexibility may help to avoid a housing crisis and forced sales due to significantly higher mortgage and rent payments. HMRC has also increased interest on late tax payments, which will hit people's finances even harder."
Graham Cox, founder of Bristol-based broker SelfEmployedMortgageHub, added: "Self-employed mortgage applicants can typically borrow slightly lower multiples of income than those in employed roles anyway, so the increased cost of living and sharply rising mortgage rates can make it tricky for directors, contractors and the like to borrow the amount they want. The sector of the mortgage market I think will be most affected is people with adverse credit. Many will face mortgage rates of 6%-8%, depending on the severity of their credit issues, and getting a mortgage or remortgage will be simply unaffordable. However much lower house prices, which I think we'll see over the next couple of years, will help improve affordability."
