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£600 on your mortgage - and there could be worse to come
Last updated at 00:37am on 12.01.07
Millions of homebuyers have been stunned by the third interest rate increase in just five months.
The combined rises have added £48 a month to the repayments on a typical £100,000 mortgage, which works out at nearly £600 extra a year.
In a surprise move, the Bank of England raised its base rate by a quarter point to 5.25 per cent, the highest level since 2001, to combat rising inflation.
Experts warned that the increase could be disastrous for families whose finances are already stretched to breaking point.
The timing could not be worse for millions who are struggling to cope after Christmas.
The rise is likely to push soaring levels of repossessions and insolvency even higher because mortgages are just one of many rising household bills.
And yesterday's rate rise could be followed by yet another, possibly as early as next month.
Nearly half of the economists polled by the financial newswire Reuters said they expect interest rates to rise further to 5.5 per cent this year.
Yesterday's decision was condemned as one which smacks of panic' by unions and an over-reaction' by the British Retail Consortium.
Liberal Democrat Treasury spokesman Vince Cable said: This latest and unexpected rise will spell further trouble for those already feeling the squeeze.
It will be very unwelcome for countless families who are already struggling with a debt hangover from Christmas.'
Peter Tutton, policy office at Citizens' Advice, said: We are already seeing a rapidly growing number of people falling behind with mortgage payments.
In some cases, they are being threatened with repossession. We know some people are taking on mortgages that stretch them to the absolute limit.
Any increase in mortgage interest rates could spell disaster for people whose finances are balanced on the very edge of affordability.'
Explaining its decision, the Bank of England said rising inflation – which is going up in Britain faster than any other major economy, according to the respected Organisation for Economic Co-operation and Development – was to blame.
The Consumer Prices Index has jumped to 2.7 per cent, its highest level since Labour came to power in 1997. The Government's target is two per cent.
New inflation figures will be published next Tuesday, but the Bank has already been seen them, suggesting the problem is getting worse.
The rate rise could also be aimed at putting the brakes on rampant house price inflation, currently rising at an inflation-busting 10 per cent a year.
A typical new mortgage is a massive £142,000. For these buyers, the three interest rates rise – in August, November and January – will add will add more than £800 a year to their mortgage repayments.
Other homebuyers, particularly in the South where property prices are higher, will see their annual mortgage costs rocket by thousands of pounds.
Even before the three rates rises, the number of repossessions and people falling behind with their mortgages were soaring.
Between January and June last year, repossessions were up 76 per cent and mortgage arrears of over 12 months were up 20 per cent on the same period in 2005.
On Wednesday, the Royal Institution of Chartered Surveyors said it fears more than 50 families will lose their homes every day this year.
It blames the fact that mortgages are swallowing up an ever-increasing share of people's take-home pay. In 1996, mortgages took up 13.5 per cent of the average couple's take-home pay. Today, the proportion is 23 per cent, leaving less cash for other living costs.
The debt charity, Consumer Credit Counselling Service, urged people to regard yesterday's rate rise as a wake-up call'.
Chairman Malcolm Hurlston said: Now is the time for all borrowers to review their situation and to think carefully before taking on further credit.'
Mortgage advisers warned that cheap fixed-rate mortgages will rapidly disappear as lenders pull their best deals.
The best two-year fixed rate mortgage has already gone up from 4.49 per cent before the first rate rise in August to 4.95 per cent today. Higher mortgage costs will make life even more difficult for first-time buyers, and will deter some home-owners from buying another property.
Some have resorted to desperate measures, such as taking out home loans for seven times their salary or mortgages worth 125 per cent of the value of their home.
The Chancellor has come under fire for changing Britain's official measure of inflation to the CPI.
It is lower than the Retail Prices Index, currently 3.9 per cent, because it excludes mortgages and taxes.
But even the CPI jumped last year from 1.9 per cent in January to 2.7 per cent, fuelled by the rise in household costs.
Bills for housing, water, electricity and gas have jumped by 11.1 per cent over the last year, the biggest rise for 16 years.
This means homeowners are double losers – their mortgage costs are going up to keep a lid on inflation which has made their household costs rise.
The unexpected rate rise should be good news for Britain's savers, who can expect higher returns on their investments.
But it may take some time for savers to see any gains passed on. Banks are not obliged to adjust their rates following a hike and are notoriously slow to do so.
• Nine in ten of Norwich Union's 750,000 mortgage endowment policyholders are at serious risk of a shortfall, Britain's biggest insurer said yesterday.
Reader views (14)
I agree with some of the comments posted. However, the key point is that this housing cycle has been sustained beyond a traditional supply and demand cycle by a combination of lax lending and profligate risk taking. Evidence of the former is provided by the ever increasing ingenuity of mortgage providers in their offerings of crazy products (50 year terms) to increasingly desperate borrowers. Evidence of the latter is provided by greedy speculators who have been 'educated' into believing that property is a one-way bet. While it is true that people need a roof over their heads it is surely the supply side that needs to be stimulated by the provision of affordable properties (public & private) rather than the recession inducing hiking of interest rates.
- Rich Fargher, Sevenoaks
Bring in a law to only allow one UK house per household, only RSLs to be multi property owning landlords, and significantly further tax the profits people make on secondary homes and put this money back into social housing schemes...
- Karl, London
Jay, my apologies, you're quite right, you never said anything of the sort - I meant Dan - sorry. Dan, evidence shows that the rental market expands when the buying market slows. I used to work in an Estate Agents in Kensignton and Barons Court (forgive me) so I know this is fact not fiction. But I hope you're right, if I ever get repossessed because of a house crash I'd like to think I could afford to rent a roof over my head, without having to turn to the government for help.
- Isabel, Woking, England
Dan - I wholeheartedly agree with you. About two years ago I was tearing my hair out about the price of houses in my home town (which - unfortunately in this case - is London) and I realized the only way to stop the prices from getting crazier was for first-time buyers to stop buying (in protest). But - somehow - they just keep on coming, and they're just making a rod for their own backs and making it worse for the rest of us (who don't own property). I feel sorry for them if the housing market crashes, but obviously I feel MORE sorry for myself and my friends who are still property-less at 30 despite having well-paid jobs... guess our parents just aren't rich enough to give us deposits!
- Lisa, London
Isobel: Supply and demand is a fallacy...there are literally thousands of properties in London being left vacant by investors waiting to make a good return on their investment.
Ted... we are not at the mercy of the "market", we control it. If idiots wish to pay over the odds for a property then they have themselves and no one else to blame. If people did a bit of research, looked at historical house price crash cycles against inflation and wages and then made an informed decision then house prices would not have spiralled out of control.
- Dan, London
Firstly, Isabel, I do not wish for a house crash. And yes, unfortunately supply and demand will prevail in this case. If you want to blame anyone, blame the government for not exercising tighter controls on immigration.
BoE haven't a clue and they're trying to stabilise everything by increasing the rates slowly. Won't work. The market will be flooded with repossessed houses and prices will crash and burn.
Luckily it won't be my problem for much longer. I hope for your sake the renting market crashes too.
- Jay, London
Jay, if there's the house crash you so wish, then there'll be hundreds more renting and this in itself will push up renting prices which in the South East are already high - demand and supply!
- Isabel, Woking, England
Most of us are at the mercy of the `market'. It's life, and there's no getting away from it; though if people overstretch themselves they have to accept the consequences of their actions.
But to gleefully look forward to a house price crash, with all its attendant misery for hard working folk, is beyond the pale.
- Ted, Shetland
You can rent, Nicola. Like everyone else.
- Jay, London
As usual as those without a house want a crash and all those with a house want prices to stabilise or rise. I wish everyone could be more objective and look at this issue from a National viewpoint rather than their own rather selfish points of view. I mean, if prices crash and families loose their homes and people without homes (if they've still got their jobs left after the inevitable recession) can afford to buy a cut price, repossessed house, how do you think these people will feel when the whole thing goes full circle again and it's them or their children facing repossession? I'll bet they'll be on the other side of the fence then.
- Isabel, Woking, England
Dan, do you really think some of us have a choice? Where are we supposed to live if we don't buy a property? These families need to live somewhere you know. I work hard & save hard too just like you.
- Nicola, London
I second that - bring on the house price crash. The inflated prices are not good for anyone (except the super rich) - and there's got to be a crash eventually, so postponing it only means more people will over-stretch themselves in the meantime - meaning more people will suffer when the crash happens.
- Lisa, London, UK
I find it quite shocking that families with children would take on so much debt and over-extend themselves to the extent that their finances collapse because of a quarter point rate rise. It's not very responsible.
- Paul, London
Anyone who believes that inflation is below 3% has their head in the sand. I can't think of a single item I have bought this month which isn't at least 10% more than it was last year. Those people who have stretched themselves have only themselves to blame. House prices are inflated way beyond reasonable values and if people want to pay extortionate prices for rabbit hutches then thats up to them. The rest of us who work hard, save and reduce our debt are finally reaping the rewards.
Bring on the house price crash and end this madness!
- Dan, London
