If mortgage costs rise, thousands of homeowners may be unable to afford repayments. We explain how to prepare for it.
Repossession rates in the UK are down so far this year, but experts warn that homeowners could face severe problems making mortgage repayments if and when interest rates rise.
The Council of Mortgage Lenders announced this week that just over 18,000 homes were repossessed in the first six months of this year, down 7 per cent on the same period in 2010.
But the CML said that the rate would be higher in the current six-month period at around 22,000, with a total of 45,000 repossessions predicted for the whole of 2012.
CML director general Paul Smee said: “Mortgage repayment problems have stabilised against a current backdrop of stable employment and low interest rates.
“It is clear from the low rate of repossession that lenders do want to keep people in their homes, and are successfully doing so in the vast majority of arrears cases. Repossession really is seen as a last resort.
Problems in the future?
But these figures reflect a period when mortgage rates are near all-time lows. Some commentators say that if and when interest rates rise, thousands of families could find it significantly harder to make repayments. These problems could be made worse if house prices remain stagnant or start to fall, and struggling borrowers find themselves in negative equity and unable to sell.
Chris Gardner from mortgage broker Obligo.co.uk, said: “The number of repossessions in the first half of 2011 is down on the same period last year.
“But the CML’s projections for the second half of this year and for 2012 are less reassuring. It predicts a steady increase in repossessions. So there's every chance this year’s apparently modest figures could be the tip of the iceberg.”
Gardner said that many homeowners were being given a false sense of security by low interest rates and the fact that banks were at the moment being more understanding of customers’ repayment problems.
“These factors have created a fool’s paradise, where people’s mortgage payments are comparatively low, and lenders are being especially tolerant of late payers,” he said.
“But lenders’ forbearance cannot last forever, and if they change their approach the rug will quickly be pulled from under many late payers, leading to thousands more repossessions.”
Chances of a rate rise
There are indications however that rates may remain at their current low level for many months.
Bank of England governor Mervyn King has said that UK economic growth was expected to be lower than previously hoped over the next year, which would make a rate increase much less likely. In the US, the Federal Reserve has already committed to keeping rates near zero until 2013 at least.
How to prepare for higher mortgage costs
You can use our mortgage calculator to assess the effect that higher interest rates would have on your monthly mortgage repayments. All you have to do is enter the size of your mortgage, and the amount of time left to pay it off. Then you can input different interest rates to see how much your monthly repayments would grow.
If you are worried about rising costs, now may be a good time to sign up for a fixed-rate mortgage. Average rates are currently among the lowest ever, although you will need to have a reasonable amount of equity in your property – usually at least 25 per cent – to qualify for the cheapest deals.
Another option is to use any spare cash to overpay on your mortgage now so that when rates do eventually rise, the size of your loan will lower.
