Mortgage rate shock for 75% of homeowners

03 April 2008 / by Rachel Mason
Three out of four homeowners will see significant increases in their monthly mortgage repayments when their fixed rate deals come to an end, according to new research by Fool.co.uk.

The study revealed that nine out of ten borrowers are in for a real shock, because they are paying around 4.8 per cent in interest on fixed or special rate mortgage deals.

1.4 million fixed-rate mortgage deals are coming to and end over the nest few months; the base rate is currently sitting at 5.25 per cent and with most deals at least a percentage point above this, many people are likely to see a significant increase in their monthly outgoings.

Four out of ten homeowners who will soon have to find themselves a new mortgage deal are on a rate of between 4.5 and 5 per cent; while one in five have a mortgage set between 5 and 5 per cent. One in six homeowners though will see their payments rocket, as they are fixed on deals where the interest is between 4 and 4.5 per cent.

Fool.co.uk's research shows that the offers being made by lenders to those coming out of fixed rates are significantly higher than their current deals, with just over 40 per cent of homeowners being offered standard variable rate mortgages of between 6 and 7 per cent, and one in four being told that their repayments will be calculated between 7 and 7.5 per cent. The average standard variable rate is 6.3 per cent – 1 per cent higher than the Bank of England base rate.

On a typical 25-year repayment mortgage of £200,000 fixed at 4.8 per cent, monthly repayments are £1,146. But every 1% rise in rates will increase repayments by around £120 – this means that borrowers who have been offered a standard variable rate mortgage at 6.3 per cent can expect monthly repayments to jump £180 to £1,326.

"Many homeowners will feel the full force of the credit crunch when their special-rate mortgage deals come to an end. For a lucky few, another good deal will be just around the corner," says David Kuo, Head of Personal Finance at Fool.co.uk.

"However, a significant number of homeowners will find that the myriad of choices that were once available has shrunk to no choice, as lenders limit their best deals to their preferred clients. But homeowners can lessen the shock by taking avoiding action now."

Fool.co.uk has found that as a result of the higher repayments that many homeowners are now facing a third are planning to switch allegiance and remortgage with another lender, and five per cent of borrowers are thinking giving up on homeownership altogether, planning to sell their homes and rent.

A further five per cent is planning to remortgage over a longer term to cut monthly payments and four per cent have said they will have to take on extra jobs to fund the hike.

Mr Kuo advises those who are coming out of fixed rate deals and facing potentially significant rises in their repayment to shop around for the best deals.

"Paying more than the amount your lender has stipulated while your special rate deal is still in place will chip away at the loan," he said.

"And by getting your finances in order, lenders will be beating a path to your door rather than beating down your door."

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