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Borrowers in a fix

Tanya Powley writes on the dilemmas facing homeowners coming off attractive two-year fixed rates.

Dynamite two-year fixed deals taken out in 2005 could see more than a million borrowers facing rises of up to 30 per cent in their repayments when the deals come to an end.

A report by Credit Suisse says over £200bn in fixed-rate mortgages were written in 2005, representing about 20 per cent of the outstanding UK mortgage market.

Homeowners approaching the end of two-year deals, often as low as 4.49 per cent, will face a shock when they are shifted on to standard variable rates which could be as high as 7.5 per cent.

Fixed deals looked cheap in the second half of 2005 after the Bank of England’s decision to cut base rate to 4.5 per cent in August.

Council of Mortgage Lenders’ figures for 2005 show more than twice the number of borrowers (427,400) took out fixed rates in the fourth quarter compared with the first quarter (202,200).

Brentchase Financial Services managing director Mike Fitzgerald believes the economy will be affected and arrears will increase.

The Credit Suisse report highlights the fact that rising interest rates from November 2003 onwards led to higher arrears across the industry in 2005, relating partly to variable-rate loans repricing upward. It warns that the industry might be entering a similar phase as two-year fixed deals come to an end.

The report says: “Over the last few years, arrears have responded far more sharply to moves in two-year fixed-rate mortgage rates than base rate itself, driven in part by the less dynamic nature of fixed-rate payments and the fact that more and more people are on fixed rates.”

Mortgageforce managing director Rob Clifford says it is a big issue because it affects so many people. He says: “Some deals were as low as 3.99 per cent while 4.5 per cent was the most typical rate. If you take it to the ultimate conclusion, if you go on to a 7.5 per cent SVR on a £150,000 mortgage, your payments will see more than a 50 per cent increase.”

The Mortgage Practitioner sole practitioner Danny Lovey says borrowers are set for a lot of pain. He says: “I have got bucketloads of these cases, with people now coming to the end of the life of their mortgage. Halifax was doing these absolutely spiffing deals in the second half of 2005 so I put a lot of my clients with them.

“We will be aiming to do a lot of remortgaging. Anyone who does not remortgage will go on to SVRs and see their rate go from 4.5 to 7.5 per cent. But the pain will be there, no matter what option they decide to take.”

John Charcol senior technical director Ray Boulger says arrears will rise but he does not believe it will be dramatic. He says: “We need to remember that people’s salaries have risen quite a bit since 2005. It will really depend on how heavily people were in debt when they applied for the mortgage. Those will be the people to struggle the most.”

On a positive note, he points out that homeowners will have seen their property increase in value, generally by around 10 per cent, which will give them some choices.

Boulger says there are a number of things borrowers can do to escape going into arrears. He says: “People can take out a mortgage with a higher arrangement fee and add the fee to the mortgage. They could also increase their mortgage by a modest amount and get a flexible mortgage or increase the term of the mortgage. It is much better to do one of these things than go into arrears and get a poor payment history.”

Clifford says: “The issue is serious but the reassuring thing is that there is no shortage of good products. In theory, you would expect arrears to occur but, in practice, the homeowner will get a rate from their lender. I think the problem is definitely containable.”

Fitzgerald says brokers need to be proactive and make sure their clients know their options. He says: “We are getting phone calls left, right and centre from people who are coming off fixed rates. There are some good deals around at the moment. GMAC-RFC is offering a mainstream two-year fix at 5.45 per cent which is great.”

But Lovey says lenders have begun withdrawing their fixed rates over the last few weeks as swap rates continue to rise. He says: “Fixed rates are being pulled rapidly so we will be seeing new higher fixes being put in their place. We will be looking at making sure people can afford what is out there. We will probably have to extend some people’s mortgages as we do not want them going into arrears.”


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