'Mortgage prisoners' rate rise fear


%VIRTUAL-SkimlinksPromo%Around one in 10 mortgage holders risk being "imprisoned" by borrowing deals likely to make their repayments unaffordable as interest rates rise over the next four years, according to an independent think-tank.

The study by the Resolution Foundation found that around 770,000 vulnerable households will suffer from a limited ability to switch to a better deal and face the likelihood of their monthly repayments eating up at least a third of their disposable income, which is known as being highly geared.
The report found that these homeowners would have little option but to repay at their lender's standard variable rate, leaving them fully exposed to changes in the Bank of England's base rate. It expects this to climb from the current record low of 0.5% to 3% by 2018.

The study predicts that this rise will begin early next year and will increase monthly repayments at the same time as lenders are setting more stringent conditions on borrowing.

Around 2.3 million households - one in four mortgage holders - risk becoming highly geared by 2018.
This is more than double the number in that position today, but the Resolution Foundation believes most will be able to refinance to secure greater certainty over future payments.

The study also found that around 3.5 million borrowers are potentially at risk of becoming "mortgage prisoners", although many will be able to successfully negotiate new terms with the lenders.

The report expressed most concern for the one in 10 mortgage holders who fall into both of these categories.

Matthew Whittaker, chief economist at the Resolution Foundation and author of the report, called for greater consideration to be given to reducing the problems that rate rises will cause.

He said: "Many borrowers have enjoyed spectacular savings over recent years, with mortgage rates falling to historic lows, and most will be able to ride the tide of gradually rising interest rates.

"But for around one in four, even modest rate rises could create financial difficulties. Those at greatest risk are members of this group who also find themselves unable to access the best deals in the market today.

"Almost one in 10 households are doubly exposed: facing the prospect of their mortgage becoming increasingly unaffordable in the future and with the market offering them limited, if any, choice today.

"There is still a window of opportunity to think creatively about the best way of reducing the risk to this vulnerable group while we still have ultra-low interest rates. But that era is coming to an end relatively soon and the legacy of easy credit and the associated debt-overhang will have to be
reckoned with.

"Financial institutions and policy-makers must consider now how best to minimise the scale of the adjustment problems these families face when interest rates start to return to normal."

According to the study, London and eastern England are most exposed to the affordability risk. An estimated 35% of households will spend at least a third of their disposable income on repayments in 2018, compared with 18% in Scotland and 19% in Yorkshire and Humber.

The people who affect house prices
See Gallery
'Mortgage prisoners' rate rise fear

They have the power to push a price higher, depending on how many other people are in the running for a home and how liberal they want to be with the truth to the buyers. In some cases, they can also do more harm than good by initially overvaluing a property. The worst case scenario is the home eventually sells for less than it would have done had it been priced realistically in the first place.

Sometimes a quick-moving solicitor can be the difference between getting the home at the price you want and getting into a bidding war or missing out entirely. If the buyer needs a quick sale, they're more likely to do a deal with someone who has a flexible solicitor who can push through the sale so it suits them.

Research by Halifax concluded that anti-social neighbours could take £31,000 off the price of an average home. If you’re selling, you should declare any problems you’ve had on a Seller’s Property Information Form, otherwise you could face a claim later on.

While an increase in Council Tax might not be too much of a deterrent to a potential buyer, plans to grant permission for new homes, a mobile phone mast or wind turbines could knock an asking price down. If you're a buyer, the local council should have details of any future planning applications and you can search them for a small fee.

A lot of traffic in an area obviously has an effect on air quality. Since 1997 each local authority in the UK has carried out studies of the air quality in its area. If an area falls below a national benchmark for air quality, it has to be declared an Air Quality Management Area (AQMA). Some residents of the Llandaff area of Cardiff expressed concern that it had become an AQMA due to an increase in traffic in the area. Whether this becomes a widespread issue remains to be seen.

Mortgage availability is a key driver of property prices. If no-one can take out a mortgage, then prices will stall and eventually fall. We've seen this happen in parts of the UK in recent years, as lenders tightened up their criteria following the credit crunch. Conversely, good mortgage availability will mean more people are competing for properties - to a seller's advantage if their home is desirable.

An outstanding local school can add around 8% to the value of a home, according to the Royal Institution of Chartered Surveyors. On the flipside, a not so good Ofsted report can take off a similar amount. If you’re concerned about a school’s performance, one way to get involved is to become a governor.

Initiatives such as the Help To Buy scheme have been credited with pushing house prices up. A buoyant economy with strong employment gives people the confidence to buy and leads to an upward shift in house prices, while rises in unemployment have the reverse effect. Planning restrictions, at both a national and local government level, affect the number of homes in a particular area.

Read Full Story