With interest rates expected to rise again in the UK in 2018, new research suggests that a 1% rise could add £830 a year to the cost of the average mortgage.
Overall such a rise would add £10 billion to the UK’s mortgage bill and four in 10 borrowers on variable rate mortgages would be the first to feel the effect of the rise as their annual mortgage bill would rise overnight by £4.3 billion, while the 59% on fixed rate deals would be impacted later, as fixed terms expire.
Buy to let landlords would pay an additional £2.4 billion, with other home owners paying £7.8 billion, or 76.5 per cent of the total increase, according to the research from real estate firm Savills.
‘This would bring an end to the historically low mortgage costs that have boosted housing affordability and limit the buying power of those needing a mortgage, and underscores our forecasts for more subdued house price growth over the next five years,’ said Lucian Cook, head of residential research at Savills.
‘We’d expect first time buyers in London, whose mortgage costs relative to earnings are already more stretched than for any other group, to be most affected,’ he pointed out.
The research report points out that a decade on from the credit crunch, the shape of mortgage borrowing is very different, with capital repayments now much higher and interest rates much lower for now.
Outstanding mortgage debt currently stands at around £1,367 billion and the annual mortgage bill at around £84.7 billion. Some 83% of mortgages are now repayment mortgages. This, combined with low mortgage interest rates, averaging 2.58%, means that regular capital repayments account for 58% of total mortgage costs at around £50 billion, with interest payments around £35 billion.
Back in 2007, total borrowing was 15% lower than current levels, at £1,156 billion, but the annual mortgage bill was 18% higher, at £100 billion. However, with a prevailing mortgage rate of 6.1% and much lower levels of repayment mortgages at 54%, interest payments were double current levels, at almost £72 billion. Capital repayments were 43% lower.
But this is not the whole story, says the report. Over the past 10 years the total number of outstanding mortgages have fallen by 551,000, primarily because mortgaged owner occupation has fallen as younger households struggle to access the market. Mortgaged buy to let landlord numbers have risen by 867,000, while other mortgaged ownership, primarily owner occupiers, numbers are down by around 1.42 million.
Indeed, Savills says, mortgaged buy to let landlords holding interest only mortgages have been the main beneficiaries of post credit crunch mortgage trends. The average buy to let mortgage interest payment has fallen by over £4,000 a year, down from £7,301 in the fourth quarter of 2007 to £3,239.
By contrast, while other mortgagees also saw interest payments fall from £6,118 to £3,201, these savings have been offset by higher capital repayments, meaning the overall average annual mortgage costs stood at £8,641 by the fourth quarter of 2017, down just £181 on the 2007 figure.
According to Savills analysis, the average home mover with a household income of £47,000 would be paying annual mortgage interest of £4,844 on a mortgage of £156,245, an increase of £1,511. Factoring in capital repayments would take total mortgage costs to £9,073, an increase of £945 per annum.
‘A 100 basis point rise would bring the combined cost of interest and capital mortgage payments back into line with the 30 year average, at around 19.3% of average incomes. Applying the 300 basis point stress test now applied to all new lending would take that ratio above levels seen in 2007, and close to the historical peak seen in the second quarter of 1990,’ Cook explained.
‘Expectations of rising interest rates are reflected in our subdued house price forecasts over the next five years. This analysis points to the difficult juggling act the Monetary Policy Committee must play,’ he added.
Savills forecasts that average UK house price growth will stand at just 14% in total over the next five years and just 7% in London.