One in ten with variable rate mortgages face rate rise stress

Yesterday’s rate rise could push mortgage payments up by over £40 and put up to one in ten of those on variable rate mortgages under financial pressure. If the Bank of England rate hits 1.5%, it could mean more than a third of people with variable rate mortgages face difficulties. Meanwhile, with 1.5 million fixed-rate mortgages set to expire this year, more than a third could face financial stress if the base rate hits 1.5%.

Figures from a survey of 2,000 people by Opinium for HL in April 2022.

Sarah Coles, senior personal finance analyst, Hargreaves Lansdown: “The rate rise may have looked relatively harmless, but with so many people’s finances on a knife edge, it risks pushing them into difficulties. Even this small increase could put one in ten people on variable rate mortgages under financial pressure. If rates continue to go up, and the Bank of England rate reaches 1.5%, more than one in three could face real financial challenges. And while those on fixed rate mortgages are protected for now, 1.5 million face the end of their term this year, and over a third might struggle with the extra cost.

Last month we asked people how much their monthly mortgage payments would have to rise this year in order to put their finances under pressure, and 10% of people said up to £50 would be enough. Once increases started closing in on £100 a month, a third of people said they’d face difficulties, and with a rise of up to £200 a month, two thirds said they’d struggle. Unfortunately, rises of this size are possible.

Assuming rate inceases are passed on in full, someone with a 25-year £300,000 repayment mortgage, on an average SVR of 4.71%, could find themselves paying £42 more each month after yesterday’s rate rise. If the Bank of England rate was to subsequently increase to 1.25%, they might pay £88 more a month overall, and if it went to 1.5%, in total, they might pay £132 more.

Those on an average two-year tracker of the same size and duration could see marginally smaller rises, but it could still be £38 this month, £75 at 1.25% and £114 at 1.5%.

Fixed-rate drama

Three quarters of mortgage holders have protected themselves by opting for a fixed-rate mortgage. And while they’ll be reaping the benefits during the fixed period, it means they’ll feel the impact in one harsh blow when their mortgage expires.

Someone remortgaging at the end of a two-year fix could see their monthly payment increase by £61, causing financial stress for more than one in ten. If they locked into a new deal after another 0.25 percentage point rise it could push their payments up £97, and if rates rose yet another 0.25 percentage points, it could add £134 to the bill – when  more than one in three people could struggle to afford the extra costs.**

These hikes may have been more manageable before we were hit with eye-watering inflation, but while we face soaring bills on all sides, for some people, higher mortgage payments will feel like the straw that broke the camel’s back.”

Calculations assume £300,000 repayment mortgages over 25 years, with all rate rises passed on. With an average SVR of 4.71%, an average two-year tracker of 2.21%, and the average expiring two-year fix on 2.29%.

If they took out a £300,000 mortgage in March 2020, when rates averaged 2.29%, and remortgaged at the current average of 2.72%, their monthly payment could rise from £1,314 to £1,375 – or £61 more. If rates rose another 0.25 percentage points on top of this, and it was all factored in, their monthly payments could rise to £1,411 – or £97 more than their pre-March 2022 payment.