personal finance

UK mortgage holders face higher bills as their fixed-rate contracts expire


At least one-third of UK mortgage holders on fixed-rate contracts are likely to see their repayments rise within two years as their current terms expire.

While 83.1 per cent of existing mortgage holders are on fixed-rate contracts, as many as 32.7 per cent of this group are on short agreements of 24 months or less, according to data from the Bank of England.

Data released by the BoE on Friday showed that rates rose at their fastest pace in a decade in the six months to May, with further increases expected as monetary policy continues to tighten in the face of prices rising faster than at any time in the past 40 years.

Andrew Wishart, head of research group Capital Economics’ UK housing service, said that those who took out two-year terms when rates were at their lowest last November, “at around 1.5 per cent”, would face “refinancing with mortgage rates sitting at around 3.6 per cent”, leading to a significant rise in repayments.

According to Vicky Redwood, senior economic adviser at Capital Economics, “the average length of fixed-rate terms is low in the UK compared to most other countries”.

“Fixed-rate mortgages in the US typically last for 30 years, while mortgages of 10 years are common in many European countries, including Germany and Spain.”

Column chart of % total stock of fixed-rate mortgages to individuals showing The proportion of fixed-rate mortgages with short terms has fallen over time

The UK has been trending towards longer mortgage terms over time, with 59.7 per cent of the current fixed-rate stock linked to five-year contracts or more as of March 2022.

According to Andrew Goodwin, chief UK economist at Oxford Economics, this indicates that “quite a big chunk of mortgage holders” will be insulated for a while.

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Higher rates on mortgage repayments will add to the financial burden of UK households struggling with the cost of living crisis. However, economists are relatively optimistic about the broader implications for the housing market.

Tom Bill, head of UK residential research at property company Knight Frank, said that while “higher rates will be a financial shock for some”, annual growth in house prices is expected to slow to “single digits by the end of the year”. 

The likelihood of more households defaulting on their mortgages is being lessened by the concentration of rate increases in resilient segments of the market, where total mortgage size is a relatively low proportion of the overall value of the property.

“The largest rate increases we’re seeing right now are for lower loan to value [mortgage holders], not highly leveraged households,” said Wishart.

This discrepancy is partly due to high leverage loans “naturally” having “a higher in-built profit margin to account for risk” and “competition between lenders for borrowers in this market”, Wishart said.

Line chart of Quoted fixed mortgage rates at different loan to value ratios showing Rates on safer mortgages have risen much more quickly than for riskier loans

Goodwin pointed out that the BoE’s “affordability tests”, designed to guard against a loosening of lending standards that could lead to unsustainable debt burdens, meant that households should be able to cope with rate rises, with a “big shakeout in the market” unlikely.

Last week, the central bank announced it would withdraw one of these tests around mortgage affordability, which required lenders to estimate the repayment resilience of borrowers against a hypothetical stress rate.

“The designated stress rate” was designed to take into account how borrowers “might cope at the height of a tightening cycle”, said Wishart. “Hopefully it’s done its job,” he added.

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