1 in 10 mortgagors risk being trapped in "unaffordable borrowing"

The Momentum UK Team 29 May 2014

Around 10% of those with mortgages today risk being imprisoned by deals which are likely to make repayments unaffordable as interest rates rise, according to a new report.

The report, published by independent think tank the Resolution Foundation, warns that around 770,000 households fall into both of two potentially problematic categories.

The first includes those already at risk of being “mortgage prisoners” - those with a limited ability to switch to a better deal. This could be because they own a very small amount of equity in their home, or they are less desirable to lenders for a number of reasons. The second category includes people facing a likelihood of becoming “highly-geared” - meaning that mortgage repayments are set to eat up at least a third of their disposable income by 2018 as interest rates rise.

This vulnerable group are doubly exposed, facing the prospect of their mortgage becoming potentially unaffordable in the next four years, with little opportunity to move to a better deal. These borrowers will have little option but to pay the lender’s standard variable rate, leaving them exposed to changes in the Bank of England base rate, which according to the report is expected to rise to 3% by 2018.

The Bank of England Governor, Mark Carney, recently expressed concern about the recent rise in house prices resulting in a possible resurgence in high loan-to-value mortgages, which he warned could increase our “debt overhang” and create economic instability.

Matthew Whittaker, chief economist at Resolution Foundation and author of the report, said:

“Many borrowers have enjoyed spectacular savings over recent years, with mortgage rates falling to historic lows, and most will be able to ride the tide of gradually rising interest rates. But for around one-in-four, even modest rate rises could create financial difficulties. Those at greatest risk are members of this group who also find themselves unable to access the best deals in the market today. Almost one in 10 households are doubly exposed: facing the prospect of their mortgage becoming increasingly unaffordable in the future and with the market offering them limited, if any, choice today.

“There is still a window of opportunity to think creatively about the best way of reducing the risk to this vulnerable group while we still have ultra-low interest rates. But that era is coming to an end relatively soon and the legacy of easy credit and the associated debt-overhang still has to be reckoned with. Financial institutions and policy-makers must consider now how best to minimise the scale of the adjustment problems these families face when interest rates start to return to normal.”