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A Consumer&#39s View

Nobody is certain how many homebuyers still have their mortgage interest calculated annually but the CML reckons it is around two million homebuyers.

Although the banks, which calculate interest daily, are now the major players in terms of new business, the small and medium-sized building societies, which traditionally calculate interest annually, still account for a substantial proportion of older loans.

But these homebuyers, on “annual rest” mortgages, probably one-sixth of whom took out their homeloans last September and October, are in for a nasty shock when they get their new monthly mortgage notification.

They will find that their mortgage interest payments have leapt by the full 1.25 per cent and it could be more if the annual review also coincides with the ending of a concessionary interest rate.

Up until now, the Bank of England&#39s five 0.25 per cent increases in the interest rate have had no effect on these borrowers. They have been paying the old mortgage rate of 5.5 per cent if they are on a standard variable rate – less if they enjoyed a discounted or concessionary rate.

But if the new annual calculation also happens to coincide with the end of a discounted or concessionary rate, some homebuyers could find that their monthly repayments more than double. For example, a homebuyer with a £100,000 interest-only loan who signed up for a 2 per cent discount would have been paying 3.5 per cent this time last year.

Monthly repayments for the past 12 months have been £291. If the concession ends this year, their new monthly mortgage payments will shoot up to £562 – almost double – as they are switched onto the new SVR of 6.75 per cent.

Many will, of course, rem-ortgage elsewhere to get a better rate although surveys show that older homebuyers, some with relatively small homeloans, are often reluctant to do so, either out of anxiety about the process or because the costs make it less than attractive to do so.

What is certain is that if any of these homebuyers were thinking of moving, they are likely to think again now that they know the real cost of doing so.

The relevance of this should not be lost on the Bank of England monetary policy committee when it meets to discuss whether another interest rate increase is appropriate.

What may be described as “mortgage drag” – the time it takes for those on annual rest homeloans to feel the pinch – is an important factor in judging how high interest rates need to go to cool house prices.

There is increasing evidence that the medicine is starting to work. Asking prices for residential properties fell by 2 per cent in five weeks, knocking almost £4,000 off the price of the average home, according to property website Rightmove, which says the 1.25 per cent increase in bank base rate since last November is now biting hard.

The CML has already admitted that its house price figures are way out of date by the time they are published. Both Halifax and Nationwide continue to report house prices rises, as does the Office of the Deputy Prime Minister and the Land Registry.

But as the CML points out, this is because the figures are at least 10 weeks out of date by the time they see daylight.

Rightmove and Hometrack monitor asking prices and mortgage approval figures respectively and are more up to date than the mortgage lenders&#39 figures and these are starting to show the first signs of a significant slowdown in the housing market. Ask any London estate agent or homeowner with a flat or house for sale what is happening and they will tell you that, for many properties, the market peaked two years ago and prices have been static or falling ever since.

As we know from long experience, what happens first in London gradually filters out to commuterland and eventually to the rest of the country.

The MPC would do well to be cautious about further rises in bank base rate. August is traditionally a quiet time in the property market as families take their annual holiday but if the market does not pick up in September, it is a clear indicator that homebuyers are starting to feel the pinch.

Hopefully, the MPC will see the wisdom of waiting until November when the full imp-act of the 1.25 per cent increase is felt by all borrowers, in particular, those on annual rests, before taking further action.


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