The mortgage market is booming. Council of Mortgage Lenders data shows lending is up 37 per cent year-on-year in October while the housing market has Government schemes coming out of its ears.
But beneath the feel-good factor lurks a future income shock for borrowers enjoying the lowest interest rates in history.
Politicians will have to cope with the fallout from rising fixed rates, trackers and standard variable rates as the era of ultra-loose monetary policy comes to an end. Borrowers who have known nothing but 0.5 per cent base rate could face a nasty surprise as bills rise.
The FCA is warning a host of lenders are planning to hike their SVRs, with FCA director of supervision Clive Adamson writing a Dear CEO letter to lenders last week warning about unfair contract terms.
Earlier this year, the Bank of Ireland and West Brom Building Society also used terms in their mortgage contracts to hike tracker rates.
The most significant impact would come from a rising Bank of England base rate. Under its forward guidance policy the Bank says it will not consider a rise until unemployment is below 7 per cent.
With the economic recovery picking up pace it estimates there is a 40 per cent chance the threshold will be met next year.
The spectre of rising rates could rattle the markets and push up short-term swap rates and fixed rate deals.
There is also the prospect of the Funding for Lending scheme, which has cut banks’ funding costs significantly, ending in January 2015.
When prices are outstripping wages and politicians are focused on the “cost of living crisis”, rising mortgage bills could play an important role in the run-up to the 2015 general election.
Your Mortgage Decisions director Dominik Lipnicki says: “Rising rates would be a disaster for David Cameron. The real fear is the Bank will meet its unemployment target and come under pressure to raise interest rates. Even the talk of an increase is politically damaging and making people worry.
“There are plenty of people who have only survived the economic downturn because of low mortgage rates.
“If that changes then the implications are massive. Interest rates could go up, swap rates could rise – these reasons all spell disaster before the election. Governments will always care more about mortgage rates than they do about savers.”
Labour has shown it is willing to intervene strongly in the energy market through the use of price caps, while the Government has proposed a price cap on pension charges and rail fares.
Former Shadow Treasury financial secretary Chris Leslie has already weighed in by warning mortgage fees could be the “next big scandal”.
John Charcol senior technical manager Ray Boulger says: “Any intervention on mortgage rates will not be direct but on how banks access funds. Government can influence the market that way without direct restrictions or intervention.
“The Funding for Lending scheme has already been extended once and, bearing in mind it is due to end four months before an election, it might be extended again for political reasons. If it is going to be extended we will know by the middle of next year.”
The Bank has signalled its 7 per cent unemployment threshold is signpost, rather than a trigger, for rate rises.
Association of Mortgage Intermediaries chief executive Robert Sinclair says: “We will only see significant upward drift in mortgage rates at the same time as the economy improves and some wage inflation. There will be a lot more linkage than people think.
“There will be some issues for some borrowers but I do not see the situation being as bleak as some people think. Rates have been low and this has given people time to make some financial provision.”
Santander research, published last week, shows one-third of borrowers are making overpayments on their mortgage rates. Combined with repossessions annually falling 12 per cent in Q3 this year, the surprising statistic could be a sign borrowers can accommodate higher rates.
Building Societies Association head of mortgage policy Paul Broadhead believes interest rates are more multi-faceted than energy costs.
He says: “Rising rates are double-edged sword. Interest rates will go back to historic norms but does it mean politicians will be asking lenders to absorb rate rises or is it time to help savers? They have taken a battering in recent years.
”It is not as simple as energy companies and excess profits because there are two signs to the coin. If rates go up it is good for savers and bad for borrowers.”