Half of homeowners would struggle with 1% rate rise

1st September 2014

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More than half of homeowners would struggle if interest rates rose by just 1 per cent, new figures reveal.

While it is impossible to predict exactly when the Bank of England will raise rates from their current record low of 0.5 per cent, many forecasters suggest that an increase is likely in the next six to nine months.

A high proportion of borrowers are concerned about their capacity to cope with even a moderate rise in their housing costs, according to Equifax, the credit reference agency which commissioned the research.

A borrower with a £200,000 mortgage would see their monthly costs rise by more than £100 if their rate increased from 3 per cent to 4 per cent.

Borrowers who have taken out fixed-rate deals will be protected from a rate rise, but those who are on tracker mortgages and home owners who have reverted onto their lender’s standard variable rate (SVR) would see their payments jump.

Andrew Webb, sales and marketing director of Equifax Personal Solutions, says borrowers should consider cutting back on their spending if they are planning to apply for a new deal.

He says: “Homeowners should be aware that their current financial behaviour could impact their ability to get the mortgage they want.

“This is particularly important as lenders are required to conduct more rigorous affordability assessments following the introduction of the Mortgage Market Review at the end of April.”

Recent figures from the Council of Mortgage Lenders reveal that new buyers are increasingly opting for home loans over a term of 30 years or more in a bid to make their borrowing costs more affordable, but the Financial Conduct Authority has warned that this may be storing up problems for the future if these home owners end up retiring with outstanding debts.

The news comes as separate analysis of house prices and salaries by the TUC reveals that Copeland in the Lake District is the only area in England with easily affordable homes, as the average property value is less than three times the typical annual income.

In 1997, around one in ten local authority areas were unaffordable – with average house prices more than five times local salaries, according to the TUC.

However, over the last 16 years, the number of unaffordable areas has soared and 84 per cent now have average house prices of more than five times the local salary.

Frances O’Grady,  TUC general secretary, says: “London always comes out top when it comes to horror stories about ludicrously over-priced housing.

“But the toxic combination of rising property prices and falling real wages has meant that local housing affordability remains a huge problem for millions of people across the country.

“Houses and flats in traditionally affordable areas of the country – from  Plymouth to Oldham ­– are now out of reach for many local people.”

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