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Have low-rate mortgages ‘spoilt’ British borrowers?

Colourful wooden houses

A new report says the Bank of England’s long-term, low base rate has led borrowers to develop ‘unrealistic expectations’ of what they should pay for new mortgages. So are we in for a rude awakening when rates rise?

Before I begin, let me say that I don’t feel in any way ‘spoilt’ by the mortgage market – and I’m sure many readers will agree with me. I couldn’t get a mortgage if my life depended on it, thanks to the tightening up of lending criteria since the credit crunch – and London’s persistently high property prices.

What’s more, while the base rate is at an historic low and many lenders’ standard variable mortgage rates (SVRs) look cheap, the reality is that many banks are charging higher margins on their mortgages now than they were before the financial crisis.

The gulf between the fixed rates consumers pay and ‘swap rates’ (the rates at which financial institutions borrow fixed-rate funds from each other) has widened, giving banks the opportunity to make higher profits.

Many borrowers are feeling comfy

Therefore, while some mortgage rates look enticingly low, it isn’t as though banks are ‘spoiling us’. Nevertheless, the current situation is pretty comfortable for some borrowers. Those people with sizeable deposits or equity stakes are able to borrow at reasonable rates.

And elsewhere, some homeowners I know have been overpaying on their mortgages for the best part of two years thanks to a steep drop in their mortgage rates. This will shorten the lifetime of their mortgages, as well as save them money overall.

But all good things must come to an end – and when rates start rising again, mortgages may suddenly become more expensive. This is why the researchers at unbiased.co.uk have warned those who’ve grown used to low mortgage rates to start preparing to pay more.

Are we a ‘spoilt generation’?

According to unbiased, the average rate homeowners would be prepared to fix their mortgages at is 3.3% – with almost one in six saying they would only be happy to fix for three years at a rate of 2% or less.

Worryingly, even the very best fixed-rate mortgage deals on the market currently cost around 3.5% – and no fixed-rate deals have been available at rates as low as 2% since 2005. So it seems homeowners could be in for a short, sharp shock when rates begin to rise – or even before, if they’re looking to tie into a new fixed-rate deal.

Mortgages will increase in line with the base rate, which will inevitably start to climb at some stage. And it’s likely that banks will start to increase the cost of their fixed-rate deals before a jump is announced, in anticipation of the rate rise.

Mortgages are always a gamble

This isn’t to say you should leap into a new fixed-rate mortgage deal now. What’s right for you will depend upon your personal circumstances, and it may make more sense for you to stay on your lender’s standard variable rate (SVR) for the time being – particularly if you can afford to overpay.

Although you should check how much your payments would increase if rates went up by one, two and even three per cent and be aware that some lenders’ SVRs can change at any time, even before the Bank of England changes its base rate.

Deciding on a mortgage deal always involves a gamble. All you can do is what’s best for you based on your current situation, and this may involve getting professional advice as well as using our nifty online mortgage comparison tool.

But one thing is certain, in my view: mortgage rates are unlikely to decrease any further from here. And when the Bank of England starts hiking the base rate again banks will stop passing out the proverbial chocolates to their customers – instead passing on the rate rises instead.

So if you’re feeling spoilt, I’d say it makes sense to enjoy the sensation while it lasts.

Nigel Whitfield says:
11 January 2011

I have an offset mortgage, and as a self employed person, the rate’s not as competitive as it could be otherwise, but it certainly suits my erratic income.

Over the last couple of years, as I’ve switched to things like cheaper broadband and phone packages, rather than spending the money, I’ve increased my monthly mortgage payment voluntarily, so I’m overpaying every month.

I think anyone who has the opportunity to do that should take it now (or ideally, should have started sooner). Rates really only can go up from here, but at least if you make overpayments while the rates are low, you’ll have helped to reduce the capital on which you’re paying interest when they go back up.

I really do think there will be a rude awakening

I know when I took a mortgage years ago – I had to supply a 10% deposit and could only buy a house at 2.5 times my annual salary. The interest rate was high. – and rose to 15% This was worse than it is today.

Many of 1000s lost their houses (no government moves to reduce the mortgage burden).The problems are high rents (bought for short term profit encouraged by the de-regulation of rents by Thatcher) – reduction of council house stock also by Thatcher – reluctance of builders to build as there is not enough of the profit that they now expect. .

I also never reduced the payment back when the interest rate dropped to reduce length of mortgage..

Martin says:
12 January 2011

What ‘low’ interest rates? Just because the bank rate is at 0.5% does not mean most mortgages are low. Nat West home owner 10% deposit pays 6% plus £1000 for a 2 year fix and 6.4% for a 5 year fix and SVR is currently 3.5% over base. Even if you have 40% deposit (ie you are are already well on housing market/ladder) these figures drop to 3.15% and 4.4% If you want a tracker then you are 1.9% to 2.5% over base for just 2 years then have to renegotiate – the SVR again 3.5% over base.

Now a few very lucky people got deals of lifetime variable of 1% over base before the melt down. You cant get those anymore.

Bechet says:
12 January 2011

I know that house prices have soared since I bought mine and, in consequence, new buyers need all the help they can find to meet repayments but, in my day, I paid interest rates (on typical BS mortgages) of between 6% and 15%. I doubt whether the svr will hit those heights this year or next but, at some point, upwards of 6% would not be surprising. Borrowers need to recognise this and plan accordingly..

I agree, Martin, there aren’t that many low rates and where there are you’re paying a huge whack in fees. My 5 year fixed at 4.54% has just ended and I’m now on the lender’s SVR which is about £20/month less. Even the best 5 year deals will only save me around a further £30/month and that’s before you take into account any fees. I’m thinking even a good 2-year deal may be worth it even with incurring another set of fees when they end. I need to get my mammoth mortgage spreadsheet out and get on the Which Mortgage finder! I love a good financial challenge 🙂

I think Martin you have agreed with the initial idea that most people are now spoilt with low interest rates. As I said I had to pay a 10% deposit and higher initial interest rates than you do now – and it rose to 15%. which is rather more than the roughly 5% you quote. 1000s suffered foreclosure because a planned 5% (roughly what you are paying now) could not cope with an extra 10% rise.

Compared with what I paid – todays 5 or 6% is low,


people also need to remember that, for a repayment mortgage anyway, that just because the mortgage rates (as opposed the base rate) may be around a third of what they have been in the last 25 or so years that their monthly repayments aren’t going to be a third less. You still have to factor in the capital repayment and this is affected by obvious things such as the amount borrowed and the length of the loan.

I really don’t understand this. I had a repayment mortgage – and though it did vary according to economic conditions – I was told beforehand what the cost of my monthly repayment was to be – and was given the choice to keep the payment the same and extend the term – or pay the increase – The increase in payment was always fairly slight – surely the capital repayment was factored in anyway (in the sense the payment took in account the capital) – even though the interest was paid off first. In other words the monthly payment remained the same. .

Whereas it was not the case for endowment mortgages – a great many friends chose the lower payments of the endowment mortgages and found at the end of the Term they had to pay many £1000s to pay off the mortgage. Many had to sell the house to pay off that mortgage.

Oops – meant the amount covered by endowment mortgage was insufficient to cover the cost of the house due to inflation and so many had to sell the house or take out expensive extension mortgages. I decided up front – I would prefer to know every payment went directly towards paying off the mortgage.

Some news for people on a variable rate – https://www.which.co.uk/news/2017/10/homeowners-brace-for-expected-base-rate-rise/

What could this mean for you?

Interest rate rises are inevitable, and have been clearly in prospect for a long time. Anyone taking advantage of such an historically low rate must be – or should have been made – aware of the need to factor this in to their finances. I believe this is considered when making an application by assessing affordability?

Many people would have taken out fixed rate mortgages to protect themselves – for a while. Home owners have been one of the few groups who have benefited from the crash. Higher interest rates will marginally benefit savers, who have been continually complaining about the lack of income from their savings.

What advice have Which? Mortgage Advisers given their clients about the size of their loans and the likely interest rate rises?

Hi malcolm, we’ve got this really handy article that covers this: http://www.which.co.uk/money/mortgages-and-property/mortgages/guides/getting-a-mortgage/bank-of-england-base-rate-and-your-mortgage

There’s some advice in there about what to do if you’re going on to your lender’s standard variable rate. For those on discount/tracker mortgages, we’d usually recommend speaking to your broker if you’re concerned about a base rate increase, because while it might sound like a solution, remortgaging isn’t the best move for everyone and these things are very ‘case by case’.

@awhittle, hello Alex – welcome home again! The question I was asking really was the advice Which? Mortgage Advisers give to their own prospective clients when seeking a mortgage. Do they point out the likelihood of future rises in interest rates and ensure that the clients have sufficient income in reserve to deal with such increases? What size of increase in interest rate might they be anticipating?