Mortgage shock hits UK homeowners as interest rates surge

Mortgage rates have become a hot topic of conversation among homeowners and tenants alike, as concerns grow over the impact of rising rates on monthly payments and rental costs. Here are five key factors contributing to the current unrest.

Inflation forecasts predicted a significant slowdown in price increases, but recent data has indicated that inflation may remain higher for longer than anticipated. This has led the Bank of England to consider raising interest rates to combat inflation, resulting in higher mortgage interest rates for lenders.

Mohamed El-Erian, former deputy director of the International Monetary Fund (IMF) and president of Queens’ College at Cambridge University, told the BBC that central banks were late to adjust to higher inflation, as they initially believed it would be temporary.

The winding down of tax concessions for property buyers during the Covid-19 pandemic has also played a role. Many buyers took advantage of lower or zero rates on stamp duty, causing a surge in two-year fixed mortgages, which are now due to expire. Over 400,000 homeowners are expected to roll off fixed mortgage deals between July and October this year, according to the Financial Conduct Authority. These homeowners now face higher interest rates on new deals, potentially adding hundreds of pounds to their monthly mortgage payments.

Anil and Jessica Jhamat, from Solihull, are among those affected, having to find an extra £550 a month. “We assumed interest rates would stay low, otherwise we’d have taken out a five-year fix,” said Anil. “Hindsight is a wonderful thing.”

Lenders are withdrawing mortgage products with little notice, creating a chaotic situation for borrowers. For example, HSBC recently gave brokers just four hours’ notice before pulling its deals, only to temporarily reopen applications the following day.

Justin Moy, founder at Chelmsford-based mortgage broker EHF Mortgages, said: “These last-minute communications just add to the stress of the situation. Decisions on rate changes and repricing must give everyone the opportunity to react in a controlled manner, especially when the increases are hefty and make a real difference to a borrower.”

Homeowners who choose to wait for rates to stabilise may be shocked by the increase in standard variable rates (SVRs) when their fixed term ends. Brokers warn that some lenders have significantly higher SVRs than others, leading to even higher monthly mortgage bills for those who do not switch to another fixed deal.

Aaron Strutt, of broker Trinity Financial, emphasised the importance of choosing a lender that treats its customers fairly when their rates come to an end.

Finally, many people have become accustomed to low interest rates over the past decade, making the current rise in mortgage rates particularly jarring. While rates have been higher in previous decades, increased borrowing due to soaring house prices has left some questioning whether they have overextended themselves financially.

The impact of these factors is not limited to homeowners, as higher costs for landlords may lead to increased rental prices and a potential reduction in available rental properties.