Earlier this month, chiefs at the Bank of England told MPs that a slew of base rate rises, intended to bring inflation under control, would push up mortgage costs for 40 per cent of borrowers over the next 12 months.
Governor Andrew Bailey and Sarah Breeden, executive director for Financial Stability Strategy and Risk at the Bank of England (BoE) told a Treasury Committee that a series of rate increases, which started in December, had already impacted 20 per cent of mortgages which were those on a variable rate.
By this time next year Breeden expected at least 40 per cent of all mortgages to have increased as borrowers came off fixed rate deals.
This is, of course, not news for brokers who have been warning borrowers to brace themselves for a rise in their monthly repayments.
Imran Hussain, director at Harmony Financial Services said most of his clients had been “keeping an eye on everything going on in the world,” and knew they were likely to be paying more when their current fix deal comes to an end.
He said clients were aware that “the previous decade of low rates has well and truly come to an end”.
Scott Taylor-Barr, financial adviser at Carl Summers Financial Services, said the challenge for brokers now was not the rise, but by how much.
He said: “At the moment many people are getting an unpleasant surprise when they come off their 1.24 per cent fixed rate from a few years ago and get told the very best deal now starts at three per cent.”
Taylor-Barr said he has not experienced problems with moving clients on to new deals so far, although this had not prevented some borrowers from panicking.
He added: “Lenders are quite sanguine with the situation, but clients are the ones in a bit of a panic at the extra few hundred quid they have to pay towards the mortgage.”
As borrowers slowly come off cheaper fixed rates, some brokers are being challenged to get their clients another deal.
Hussain said he was starting to find issues with clients whose circumstances had changed. “For example, one partner is no longer working so they are unable to move to another lender due to affordability, so the only viable option is to then stay with their current lender and take a product transfer.”
Lewis Shaw, founder of Shaw Financial Services, said that so far he believed the stress tests used prior to taking out their mortgage meant most borrowers still came in within current lending affordability rules.
Changing rules
But Shaw said he could see problems arising as a result of the BoE’s decision to ditch the stress test, which checks a borrower’s ability to pay a rate three per cent above a lender’s reversion rate.
Last month, the Financial Policy Committee (FPC) confirmed that this affordability stress test for mortgages would be withdrawn from 1 August 2022. Ending the restriction also means a lender can issue at LTI ratios of 4.5 times income or greater.
Shaw said: “Perhaps it was a reason to have kept the stress test rather than removed it. The problem facing borrowers is that because of a decade of artificially low rates, people have become accustomed to remortgaging and seeing their payments and interest rates reduce; but those days are over.
“It’s a shock to their systems simultaneously as everything else is rising in price. It’s particularly jarring for those previously new borrowers about to come to the end of their very first fixed-rate product, whether that was for two or five years.”
Shaw said it is now up to brokers to manage their clients’ expectations.
He added: “Many first-time buyers took mortgages with either five per cent or 10 per cent deposit, thinking when their first deal was up, they’d be quids in as their next rate would be lower.
“Instead, they will find that they’re all on the up, and the mortgage payment will rise in many cases. Many people forget that we operate in a mortgage and property market.
“Markets rise and fall; they can treat you well and quickly turn against you. However, many consumers think it’s unfair as they often expect things to always go in their favour, even though there is always a risk from the outset. It’s a peculiar symptom that many people consistently overestimate the upside at the same time as dismissing potential downsides. This is one wake-up call many do not want to face.”
Ashley Thomas, director at Magni Finance, said a lot of his clients have seen their rates more than double.
He added: “It doesn’t surprise me that 40 per cent will see their payments go up next year, I think it may be higher and it will continue to increase as borrowers come off existing fixed rates in the future.
“Those who locked their mortgages at a five-year fixed rate last year at less than one per cent will be feeling a huge sense of relief with the current rates.”
Brokers need to act fast
Affordability is just one challenge brokers are negotiating. Another is the speed in which the market is moving.
Rhys Schofield, managing director at Peak Money, said: “We’re having no issues placing clients but rates are increasing rapidly and even waiting a week or two can cost clients thousands of pounds in extra interest. We need to make sure customers talk to brokers as early as possible to try to secure rates.”
Rob Peters, principal at Simple Fast Mortgage, said: “The best time to review remortgage options was six months ago. The second best time to review remortgage options is right now.”
Peters said lenders were, so far, doing their best to help ease the situation.
He explained: “Some mortgage lenders are proactively looking at ways to assist those remortgaging.
“For instance, NatWest has extended their mortgage product transfer window to six months meaning borrowers can ‘lock in’ today’s rates much earlier. Nationwide is allowing those remortgaging to borrow up to 6.45 times their income on a like-for-like remortgage.
“This is a clear message that they are happy to help as they have been able to afford it until now. I expect the market to further adapt to support borrowers.
Sabrina Hall, mortgage and protection adviser at Kind Financial Services, disagreed: “Lenders are factoring in rises in the cost of living into their affordability calculators so we can have a case where the client’s income is exactly the same, but the lenders are suggesting that they can no longer afford the mortgage.
“This combined with the general increase in the cost of living is really worrying and will have a huge impact on many families and households.”
Value of a broker
One of the more positive outcomes of a rise in rates could be the opportunity for brokers to sell their value to borrowers, for whom the right deal could save them hundreds, if not thousands a year.
Taylor-Barr said: “Of course, there are a few things that could potentially be looked at to help, such as extending the term of a repayment mortgage, to help manage that cost increase, but this is best looked at by a professional mortgage broker on a case-by-case basis, there is not a one-size-fits-all fix.”
Even if there is a summer pause in rate rises, brokers are uniquely placed to help their clients save at least some money on a major household expense.
Dariusz Karpowicz, director at Albion Financial Advice, said: “There are definitely interesting and worrying times ahead. The main question now is whether the Bank of England will increase rates to the required level of over six per cent.”
