Payment shock in store for those on a fixed-rate mortgage

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With mortgage payments expected to rise by up to 60 per cent in coming months many people will not be able to afford to keep their homes

Thousands of home-buyers on fixed-rate mortgages face a crippling "payment shock" as a result of the global credit crunch, it was claimed last night.

Some could find their monthly repayments surge by up to 60 per cent, bringing the threat of debt and repossession.

More than two million homeowners are expected to come off relatively cheap fixed-rate deals in the next 18 months.

Many banks have tightened their lending rules as a result of the credit crisis which began in America's so-called sub-prime mortgage market and spread to hit the Northern Rock bank earlier this month.

Everyone coming off a fixed rate in the coming months is likely to find themselves paying more, even if they able to secure a new fixed-rate deal.

But those who have a County Court Judgment over an unpaid debt or a black mark on their credit record, perhaps because they fell behind with a mobile phone bill, will be in particular danger.

Some will be forced to switch to their lender's standard variable rate, which is likely to be two-and-a-half percentage points higher than they are currently paying.

Others will be moved to deals specifically for those with a patchy credit history, which can charge extortionate interest rates.

Someone with a £125,000 fixed-rate mortgage taken out a couple of years ago, pays around £600 a month on a rate of 5.7 per cent.

If they are reclassified as a credit risk they may have to pay at least 25 per cent more - taking payments to £750. Some will see monthly payments rise to as much as £960.

The alarm has been sounded by the online home loans broker Moneygate and the

respected credit ratings agency Standard & Poor's.

Director of Moneygate, Dennis Reed, said: "The mortgage market is changing by the day.

"As lenders look to tighten their terms a person could be labelled a bad credit risk and sub-prime just because of a small financial error in their past.

"The knock-on effect of that re-classification is very significant.

A mainstream mortgage payer being shunted into the sub-prime market could face crippling interest charges of up to 2.5 per cent higher than average.

"People applying for mortgages will also need to be much more accurate about the information they give.

"For example, a County Court Judgment that in the past was not considered crucial, could now mean the difference of being reclassified as sub-prime when they come to re-mortgage. A lot of people are in for a shock."

Analyst Andrew South, of Standard & Poor's, said: "Many borrowers took out fixed-rate loans between late-2005 and late-2006.

"Most of these are due to reset to significantly higher rates over the next 12 to 18 months, giving rise to a sudden 'payment shock' for many borrowers.

"A number of coinciding factors mean the likely scale of this upcoming effect. . . is relatively severe by recent standards."

Standard & Poor's says there are 80,000 people who are already classified as sub-prime whose fixed-rate deals will come to an end by the end of 2008. This group will certainly face much higher rates.

Last night the head of Britain's biggest mortgage lender also added his warning.

Andy Hornby, the chief executive of HBOS, which owns Halifax, believes "the mortgage market is about to undergo a fundamental shift" because banks are struggling to make a profit on home loans.

Banks make an average profit on mortgages of just 0.7 per cent in what has become one of the most competitive areas of lending over the past few years.

He said : "Six highly benign years of credit experience has led to a sharp reduction in mortgage profitability."

The change in the way banks assess risk can be traced back to the fall-out created by the failure of thousands of subprime mortgages in the United States.

Global banks have been left carrying mind-boggling losses running to billions of pounds and so have become reluctant to lend to one another.

The resulting credit crunch has pushed up the cost of short-term borrowing on international money markets.

While banks and building societies have now adopted much tighter lending rules for mortgages, loans and credit cards.

Any payment shock to home buyers could have wide-ranging consequences for the property market.

The failure of thousands of sub-prime mortgages in the U.S. triggered a fall of 4.5 per cent in average prices because of a blow to confidence and the available of a flood of cheap property on to the market.

 

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