Rocketing interest rates could add more than £13billion to household mortgage bills by the end of next year, according to new analysis conducted for The Mail on Sunday.
The staggering extra cost threatens to tear another hole in household budgets at a time when many families are struggling due to the cost-of-living crisis.
The Bank of England raised interest rates by 0.5 percentage points to 2.25 per cent on the day before the Chancellor’s mini-Budget, which was delivered nine days ago.
Staggering: Rocketing interest rates could add more than £13billion to household mortgage bills by the end of next year
Huw Pill, the Bank’s chief economist, warned last week that further significant increases are in the pipeline in an attempt to bring down soaring inflation.
Financial markets are expecting the base rate to rise as high as 6 per cent next year. Many lenders are currently charging about 4 per cent on two-year fixed deals.
There are growing concerns that a wave of mortgage defaults could hit house prices and leave banks and building societies with rapidly rising bad debts on their balance sheets.
An estimated 2.1million fixed-rate mortgage deals will expire between now and the end of next year.
Those borrowers will almost certainly be faced with much higher repayments when their existing fixes come to an end.
Forecasts suggest that a typical homebuyer will have to pay hundreds of pounds more per month. Many families with overstretched finances will run into difficulty and some of those will undoubtedly be forced to default. The impact could amount to £13billion in additional repayments based on a £150,000 two-year fixed-rate mortgage.
The biggest mortgage lenders are Lloyds – which also owns Halifax – along with NatWest, Nationwide, Santander and Barclays.
Andrew Montlake, of mortgage broker Coreco, warned that rising rates will mean an ‘increase in potential repossessions’, which will in turn result in write-offs for banks and building societies. He said it is now an ‘inevitability’ that lenders’ bad debts will rise.
Russ Mould, investment director at stockbroker AJ Bell, said banks may have to start earmarking large sums to cover possible losses. He added: ‘It would hurt and it would affect their profits.’
Banking industry body UK Finance estimates the number of fixed-rate deals coming to an end will rise by almost 40 per cent in 2023. The sharp increase follows a surge in the number of borrowers who took advantage of Rishi Sunak’s stamp duty holiday during the pandemic.
Scott Taylor-Barr, an adviser at Carl Summers Financial Services, said borrowers have had a ‘sharp intake of breath’ when confronted with the rate rises.
He said he has advised some clients to consider delaying their retirements so they can afford higher home loan repayments.
Alice Guy, personal finance expert at Interactive Investor, described the rise in rates as ‘terrifying’. She said it could mean that the monthly repayments on a £150,000 mortgage could leap by as much as £500.
Guy who prepared the analysis for the MoS, said: ‘UK households on fixed mortgage deals could pay £13billion extra each year in mortgage costs if interest rates hit 6 per cent in 2023, as many experts are predicting.’
She added that a family with a £200,000 mortgage could end up being charged an extra £724 each month – amounting to an ‘eyewatering’ £8,688 extra per year. Last week was described as the worst for the mortgage market since the financial crisis of 2008. A record 1,000 home loan deals were withdrawn by lenders on Tuesday alone.
In recent times homeowners have been borrowing at rock-bottom rates. Fixed-rate deals were available at 1 per cent as recently as last year.
Analysts fear soaring repayments could cause house prices to plummet by next year.
Experts from Oxford Economics said ‘a scenario whereby house prices crash is looking increasingly likely’.
They believe homes are currently overvalued by about 30 per cent.
A former member of the Bank of England’s Monetary Policy Committee, who asked to remain anonymous, told The Mail on Sunday that one of the biggest problems facing the UK is a potential housing crisis.
He said the jumps in interest rates are going to be much more significant than the reduction in stamp duty. ‘House prices are definitely going to stop going up,’ he added.