How to ease the pain as mortgages go up
Life is about to get much more difficult for the two million borrowers who fixed their mortgage payments on cheap two-year deals in 2005. But we have some advice on how to cushion the blow.
Housing economist John Wriglesworth has been good to MoneyWeek over the years. Every time we've needed someone to provide a bullish argument on the property market for us to disagree with, he's been there with one. For years, every extraordinary rise in house prices has been met by Wriglesworth with a relentlessly upbeat prediction that they will soon go much, much higher.
The really irritating fact, of course, is that he has been absolutely right. So we're interested to see that not only are house prices finally turning down in much of the UK (London excepted, of course), but that, according to The Mail on Sunday, even Wriglesworth is coming around to the idea that a correction is in sight. "Another two increases in the base rate and Mervyn King is dicing with a housing crash," he told the paper. And "if, heaven forbid, rates rose one to two percentage points, we could see prices dive-bomb by 30%".
Still, we aren't entirely in agreement with Wriglesworth we think that, given the pressure on Britain's homeowners, it's going to take a great deal less than a 2% rise in rates for things to start going wrong. According to figures out from the Liberal Democrats, the average family already spends more money as a percentage of household income servicing its debts than at any time in the last ten years. In 1997, we spent 7.5% of our income on interest today, we spend 9%.
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Worse, that number is about to go up. In 2005, around two million borrowers fixed their mortgage payments on very cheap deals for two years. Now they are going to have to remortgage with what the Daily Mail calls "vastly dearer loans". Two years ago there were fixes on offer at 4.5% or less. Today, the best buys out there are more like 5.5% and most of them come with arrangement fees' of £1,000-plus. And within a few weeks, most lenders expect even 5.5% to be a distant dream: fixed rates over two years are on a relentless and steep upward slope, says Andy Caton of Yorkshire Building Society.
So if your mortgage payments look set to leap, what can you do to ease the pain? First, you can repay as much of the mortgage as you can: there is little point in having cash in the bank earning 5.5% and paying 6% on your mortgage debt, particularly when the income on your savings is being taxed. Otherwise, says The Sunday Telegraph, you might consider extending the term of your mortgage to cut your payments. A £250,000 repayment mortgage over 15 years will cost £2,075 a month over 15 years, but only £1,743 over 20 years. The downside? Take the 20-year option and, assuming rates stay the same (which is unlikely), your total interest bill will be £47,220 higher. This is only a strategy to use if you're desperate.
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