A MORTGAGE expert has advised homeowners to cut their cloth accordingly – as interest rates are still a “ticking time bomb.”
Adam French, senior editor at NerdWallet UK, has warned the financial crisis is likely to get worse before it gets better and that even people on a lengthy fixed term need to start budgeting for the future now.
With prices rising across the board, mortgages are being hit hardest as lenders fight back against inflation.
That’s why preparation is key to prevent banks posing a threat to people’s current lifestyles.
Adam says: “ In essence, the problem all comes back to inflation and prices going up across the board. There are lots of reasons for that – Brexit, the pandemic, climate change, the War in Ukraine and the reduction of people in the workforce.
“As prices go up, there are ways the central bank fight back against that – and the main one they’ve taken is to increase the base rates.
“They’ve increased from historic lows by 13x to five per cent now and are expected to rise higher.
“A few years ago you could get a mortgage rate of one and a half per cent and now they could average six per cent. Banks take money out the economy to cool demand so prices can come down.
“Ultimately it’s taking money out the system to do that and the people being hit hardest are people with mortgages – which is roughly a third of households across the UK.”
Homeowners are now stuck between a rock and a hard place when it comes to negotiating their mortgages. Anyone who has a fixed term due to end soon faces the prospect of their monthly direct debit soaring considerably.
While those on a variable rate live in hope that their gamble pays off and there’s no sudden increases.
As well as shopping around for the best deals and speaking to independent brokers, direct lenders and even credit unions, Adam reckons it should all begin with people looking at their own books.
He says: “The base rate going up means there’s trickle effects of people being hit by a huge increase in monthly outgoings. It’s a huge financial ticking time bomb where you may not be hit right now, but suddenly your outgoings will boom and there’s very little you can do about that.
“It starts with budgeting. Can you afford it, are there things you can cut out? If your mortgage has been affordable until now, then budgeting is the starting point to suss out what you can afford to pay out every month.
“If you are approaching the end of a fixed term, you can agree a new deal six months in advance. My advice would be to go to a mortgage broker to find the best deal you can, just like you would when changing insurance or broadband provider.
“If you’re on a variable rate you can sit tight and hope the rates drop. As much as you’re more exposed to rate increases, you’ll feel the decreases quicker too so it’s a real catch 22.
“Budgeting is a challenge for the foreseeable future.There are no easy fixes there and this is where you need to see targeted support from government for those who are feeling the pinch the most.”
Looking forward, Adam hopes those struggling know how to access help.
Last week it was announced that a majority of mortgage lenders agreed to allow customers who are up-to-date with their payments to switch to interest-only payments for six months – or extend their mortgage term to reduce their monthly payments.
Borrowers will have the option to revert to their original term within six months as part of the efforts to help people afford their homes during testing times.
While it was also revealed people will not be forced to leave their home without their consent unless in exceptional circumstances, in less than a year from their first missed payment.
There are also other schemes in Scotland such as Home Owners’ Support Fund and other assistance for those relying on Universal Credit.
However, some of these short fixes also result in a longer mortgage repayment period, giving up stakes in your property, and the potential of higher monthly costs in the future.
Adam thinks people should remain hopeful yet realistic about the fate of their finances. He says: “Towards the end of last year people were forecasting rates might hit 4.25 per cent and now we’ve hit five per cent and they’re predicting we might get to six per cent before it drops away.
“These are just guesses. Until inflation is under control and heading towards the two percent target set by the Bank of England, the rates will continue to be high.
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“What the new normal will be looking ahead is hard to say. I don’t think rates will come down to the levels we once knew.
“But hopefully they will come down from the way they’ve spiked at the moment and people will start to see some light at the end of the tunnel.”
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