Homeowners With Fixed Mortgages Ending Next Summer Will See Biggest Hikes in Payments


July 2022
Homeowners With Fixed Mortgages Ending Next Summer Will See Biggest Hikes in Payments (1)

Homeowners With Fixed Mortgages Ending Next Summer Will See Biggest Hikes in Payments

Homeowners whose two-year fixed-rate mortgages lapse in September of 2023 should expect to pay an average of £163 per month more when they refinance.

The analysis from Capital Economics assumes a 75% LTV mortgage secured against the average home.

Homeowners who took out mortgages in September 2021 benefited from historically low interest rates, driven by the 0.1% base rate and fierce competition among lenders in the superheated post-lockdown housing market. Monthly costs for a typical two-year fixed-rate mortgage stood at just £719 that month.

Less than a year later the situation is very different. The Bank of England has hiked the base rate five times since December to 1.25% to curb inflation. Lenders are withdrawing mortgage products and launching more expensive replacements nearly weekly. Further hikes in the base rate as expected before the year is out.

By next September, those average borrowers will pay £882 per month when they remortgage onto another two-year deal - £163 more than before, Capital Economics has predicted.

However, mortgage costs won’t be much different in September 2023 than they were in September 2018. Borrowers with five-year fixed-rate mortgages refinancing that month will see their typical costs increase by just £7 per month.

The rise in mortgage costs is based on Capital Economic’s forecasts for average mortgage rates. It currently expects mortgage interest rates to reach an average of 3.6% by the summer or autumn of 2023.

Despite the sharp rise in interest rates, Capital Economics says the widespread use of fixed-rate mortgages, higher levels of capital repayment than in the past, and low unemployment mean the risk of widespread financial distress among homeowners is low.

Interest rates will still be comparatively low compared to previous decades. With low interest rates, a larger portion of a mortgage payment goes toward paying down the loan's principal and not just covering interest. Capital Economics says that in recent years, two-thirds of a household’s mortgage payments went toward the capital of the loan, compared to less than 30% between 1970 and the early 2000s.

These higher levels of capital repayment mean homeowners need to borrow less. Those on two-year fixes need loans that are 5% smaller, while those with five-year fixes require loans for 12% less.

Higher levels of capital repayment also allow homeowners to progressively move to loans with lower LTV ratios as they pay down the principal. Loans at lower LTV ratios have more favourable interest rates.

However, the rising costs of mortgages could cool down house prices.

Andrew Wishart, senior property economist at Capital Economics, said: “Even though we are unlikely to see widespread financial distress among existing homeowners, we think that the impact of rising interest rates on mortgage affordability for new purchases will weigh on demand enough for prices to fall.

“A lack of forced sales should prevent the correction we expect turning into a crash, unless there is a more severe deterioration in the labour market.”