One in four mortgage holders will not be able to afford to increase monthly payments by £100 and almost half will struggle if they increase £250, says Citizens Advice
- Citizens Advice research highlights the risk if interest rates continue to rise
- One in 7 mortgage holders have already reduced their essentials to save money
- Mortgage rates have skyrocketed after the ill-fated mini-budget
- Borrowers who are at the end of their firm deals face a severe mortgage shock
More than a quarter of mortgage holders could not afford their monthly repayments if they increased by £100 a month, according to a new Citizens Advice study.
Almost half (45 per cent) would not be able to make their payments if they increased by £250 a month, the organization said.
In September, 49 percent of Citizens Advice mortgage holders gave debt advice and said they were getting more money out of their finances than into it each month.
Count the Costs: Rising mortgage rates have led 1 in 7 borrowers to cut back on what they need to make ends meet, according to Citizens Advice
Citizens Advice estimates that this is the case for around 11 per cent of all UK mortgage holders.
The stark results underscore the risk of rising mortgage rates. Average interest rates remain above 6 percent after steep increases over the past month.
On September 23 (mini-budget day), the average interest rate on a two-year fixed-rate mortgage across all deposit sizes was 4.74 percent, according to Moneyfacts.
A little over a month later, on October 28, it was 6.53 percent. An increase of this magnitude would increase the monthly payments on a £200,000 25-year mortgage by £134, or an additional £1,608 per year.
The average for a five-year fix is now 6.36 percent.
Experts are warning of a looming mortgage crisis as borrowers who fixed their rates two or more years ago got much cheaper deals and will see their spending soar.
Last year, Nationwide launched a product with an interest rate of just 0.87 percent and a 40 percent down payment.
At the time, TSB had an even cheaper offer of 0.84 percent for debt restructuring.
On the way up: Mortgage rates have risen sharply in recent months as rising borrowing costs have pushed homeowner prices higher
The problem is further exacerbated by the cost of living crisis, caused in part by inflation rates.
The consumer price index rose 10.1 percent in the 12 months ended September 2022, compared to 9.9 percent in August.
According to a Citizens Advice survey, one in seven mortgage holders has already reduced essentials, while one in ten has taken out expensive borrowing to make ends meet.
For mortgage holders on a negative budget who already can’t afford their loan payments, the number jumps to one in four cuts and nearly one in five using expensive borrowing.
Citizens Advice data paints a stark picture of a looming mortgage crisis when borrowers can’t afford to pay their monthly bills.
In a blog accompanying the data, Citizens Advice Policy Manager David Mendes da Costa and Citizens Advice Policy Manager Rachel Beddow wrote: “When people can’t afford their mortgage, one of three things happens.
“They can miss mortgage payments and default on their payments. You can reduce essential food and energy expenses. Or they can use credit to fill the gap and go deeper into debt.
Mortgage lenders need to consider how they can help people in financial difficulty, for example by restructuring payments, deferring payments and eliminating additional fees and charges
“Of those three, it is the first where people are best protected. Mortgage lenders need to consider how they can help people in financial difficulty, for example by restructuring payments, granting payment deferrals and eliminating additional fees and charges.
“But the concern is that people aren’t getting that support and are instead forgoing essentials or going deeper into debt.”
According to Costa and Beddow, the FCA and Bank of England are currently at their lowest mortgage arrears in 15 years. However, they warn that this could be a sign that people are not reaching out to ask for help and risk deepening their debts or struggling without essentials.
You can get in touch with Citizen Advice or call Adviceline (England) on 0800 144 8848 or Advicelink (Wales) on 0800 702 2020.
What to do if you need a mortgage
Borrowers who need to find a mortgage because their current fixed-rate contract is expiring or because they have agreed to buy a home have been urged to act but not panic.
Banks and building societies continue to lend and mortgages continue to be offered and applications accepted.
However, interest rates change quickly and there is no guarantee that the deals will last and not be replaced by higher-interest mortgages.
This is Money’s best mortgage rate calculator, powered by L&C and able to show you quotes that match your mortgage and property values
What if I need a debt restructuring?
Borrowers should compare interest rates and speak to a mortgage broker and be prepared to bargain to secure an interest rate.
Anyone with a fixed income deal that’s ending within the next six to nine months should assess how much it would cost them to refinance now — and consider starting a new contract.
Most mortgage deals allow fees to be added to the loan, which are then only charged upon closing. This allows borrowers to secure an interest rate without having to pay expensive brokerage fees.
What if I buy a house?
Those who have agreed to buy a home should also aim to secure the installments as soon as possible so they know exactly what their monthly payments will be.
Homebuyers should be wary of overstretching and be prepared for the possibility that home prices could fall from their current high levels as higher mortgage rates limit people’s ability to borrow.
How to compare mortgage costs
The best way to compare mortgage costs and find the right deal for you is to speak to a good broker.
You can use our best mortgage rate calculator to find offers that match your home value, mortgage size, term and fixed rate needs.
Note, however, that interest rates can change quickly. So if you need a mortgage, you should compare rates and then speak to a broker as soon as possible so they can help you find the right mortgage for you.
> Check out the best fixed-rate mortgages you can apply for