Increasing Standard Variable Rate (SVR) mortgage payments
In February this year, the Bank of England announced that it expects inflation to reach 6% by Spring 20221. It has already declared an increase in the Bank Rate to 0.25% in December 2021, up from its historic low of 0.1%. February then saw a second uplift to 0.5%, along with the suggestion that more rises throughout the year can’t be ruled out1.
This means that those homeowners on a tracker mortgage or their lender’s SVR will see a rise in their monthly mortgage payments as a reflection of the Bank Rate change. Increases will vary between households depending on their products and situation.
Stress testing and rising costs
It’s been reported that as lenders already stress test affordability during the application process the current situation may not have too much of an effect on mortgage affordability. Further to that, the Bank of England is considering allowing lenders to stress affordability at lower rates2.
But it seems a key factor that will affect affordability is the rising cost of living across the board that many are experiencing. Lower income households are likely to experience the negative consequences of this more than those on higher incomes who may have more of a cushion to absorb the impact.
In February, Knowledge Bank released data that highlighted how many borrowers were turning to second charge mortgages to help alleviate current financial burdens3. The phrase ‘capital raising for debt consolidation’ featured heavily in brokers’ searches in January, mirroring the current rise in living costs.
Low 95% mortgage take up
You might expect with the current squeeze felt by many that there would have been a large take up of 95% loan-to-value (LTV) mortgage products. However, HM Treasury data released in February shows that there were just over 6,500 95% mortgages completed in the six months between April and September 20213. Of this number, 84% were first-time buyers and that figure is reportedly well below the number of buyers looking to purchase their first home.
There could be a few different reasons why many first-time buyers are not taking advantage of the scheme. If house prices may decrease this year due to rising interest rates a homeowner with such a high loan-to-value (LTV) mortgage could find themselves in negative equity quite quickly4.
Also, as we move (pun intended) into life beyond Covid restrictions, it may be that borrowers hoping to get on the ladder have been waiting to see what their work and home life look like before making any life-changing decisions.
Will there be more competitive products available?
It’s difficult to say exactly what lenders will do with the economy in such a changeable situation.
However, Furness Building Society recently launched a new range of mortgage products with discounted interest rates that are free from early repayment charges (ERC)5. The company has stated that as the cost of living creeps up, it wants to give customers some peace of mind by keeping mortgage payments as low as possible.
Of the impact on affordability, B Mortgage Services Mortgage Adviser Mark Walker says:
We may find lenders changing their affordability models to consider the increase in living costs, which could see a reduction in the mortgage sum offered on a like-for-like basis compared to the start of the year.
The hardest hit with rate increases are those who remain on their lenders SVR rate as they are already paying over the odds.
Homeowners whose existing mortgage deal is coming to an end within the next six months can start the process of remortgaging now. The benefit of this is that they can secure a new interest rate when they apply meaning they won’t be negatively affected with any potential future interest rate changes.”