Fears Any Base Rate Rise Could Lead Three Million People Into Mortgage Difficulties

With millions of households in the UK on variable rate mortgages

, the prospect of rising interest rates is a matter of concern to many. Whilst the Bank of England has kept interest rates at their record low of 0.5 per cent since early 2009, recent comments from the Governor, Mervyn King, have suggested that interest rates are set to rise sooner rather than later.

Many experts have serious concerns about mortgage affordability in the UK. The Financial Services Authority's guidelines for affordability state that 'a mortgage is affordable if its level and terms allow the consumer to meet current and future payment obligations in full, without recourse to further debt relief or rescheduling, avoiding accumulation of arrears while allowing an acceptable level of consumption'.

However, recent figures from the Council of Mortgage Lenders (CML) show that almost three million borrowers would fail the FSA's assessment if interest rates were to rise. A 2 per cent hike in the Base Rate would leave around 2.9 million homeowners in breach of the affordability guidelines.

On top of higher than expected inflation figures, rising fuel bills, increases in home energy costs and wage freezes, many households are struggling to make ends meet. So, increasing numbers of people are researching the best remortgage rates in order to save money and to protect themselves against future interest rate rises.

A sizeable number of worried homeowners have looked to fixed rate deals, but the majority who have looked into the rates have discovered an additional headache rather than finding a solution. Owing to the popularity of fixed rate deals, especially since the start of this year, many mortgage lenders have raised the rate on these products, accordingly.

London & Country's David Hollingworth said: "Heightened anticipation of a hike in interest rates has led to a rapid shift in fixed rate mortgage pricing. Lender after lender has moved to increase its rates, often on more than one occasion.

He added: "Borrowers hoping to access fixed deal to protect against rising rates will find that they've missed out on the lowest mortgage rates, although the products still look good in historical terms."

Recent data shows that the cost of the average five year fixed rate mortgage in the UK has increased by 0.33 per cent since January 2011. The average five year deal is now at 5.66 per cent, which, on a GBP 150,000 interest only mortgage, represents a GBP 41.25 hike in monthly repayment compared to January's best deals.

As the number of remortgage approvals in the UK continues to increase, lenders seem set to continue raising the costs of their fixed rate deals. Remortgage numbers rose by 16 per cent between February and March according to recent figures from the Council of Mortgage Lenders.

What is clear from this is that there are problems linked to each option and the everyday borrower should look to protecting his or her financial future by taking action now and seeking out advice from a professional mortgage broker or lender to make sure they access the best remortgage rates.

by: Howard Ogollegos

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