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Small Interest Rates, But Big Problems For Some

February 20, 2011

With the base rate hitting a record low of 0.5 per cent, struggling households have been saved by low monthly repayments on their mortgage. However, the rise in inflation will also see interest rates rising, possibly leaving homeowners struggling to meet rising costs. Although the rate rises may seem small and rather insignificant on the face of it, it’s the fact that they are coming from such a low base rate and potentially amidst a far from booming economy that means the rise will hit homeowners harder than they may expect. For example, a 2 per cent rise on a £150,000 repayment mortgage equates to an additional £158 per month. It’s easy to see how a relatively small sounding rise in rates lands homeowners with bills they will struggle to pay.

For those attempting to enter the current market, figures are not encouraging either. Mortgage lenders are showing a clear preference at present towards existing homeowners with substantial equity in their property. When they do lend to new borrowers, they are preferring those with a large deposit and who therefore require a relatively low loan to value mortgage. January figures show new mortgages had an LTV ratio averaging 58.9 per cent, while remortgages averaged just 51.8 per cent. It is clear, at present, that UK Mortgage Lenders have lost their appetite for risk.

Current rates appear to support the above thesis. Many mortgages require a 20 per cent deposit with the best deals routinely reserved for those with a 25 per cent deposit. Buyers with just a 10 per cent deposit requiring a 90% Mortgage can see themselves paying an interest rate of 6 per cent of more, despite such a low base rate.

Michael Sale at moneyfacts claims that increases in fixed mortgage rates combined with talk of base rate rise has resulted in heightened activity among existing borrowers looking for a new deal’. However, over seven million homeowners haven’t reviewed their mortgage since March 2009 and approximately 52 per cent of those on standard variable loans haven’t either, according to

One way for existing borrowers to gain is to make overpayments on their mortgages whilst rates are low. In the long term, this can save money by avoiding interest charges and reduces the overall repayment period. Although mortgages often have annual overpayment limits, many lenders have relaxed this term. Most allow overpayments of up to 10 per cent per year of the loans balance. Halifax, BM Solutions and C&G all allow overpayments of up to 20 per cent per year on variable rate deals until the end of March.

Written by Richard Best & Kate Hannon

20th Feb 2011

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