PERSONAL ACCOUNT

Mortgage rates will rise, but it won’t be the catastrophe some predict

Along with the fall in the pound and the fall in the value of British government bonds, or gilts, has come the to-be-expected rise in the underlying interest rates that drive the cost of mortgage borrowing.

Called “swap rates”, these register the price at which banks secure capital in the market, which they in turn package up and lend out to households as fixed-rate mortgages.

Since around four in five mortgages currently taken out are on a fixed rate, usually for either two or five years, these swap rates are important.

But they are not the only determinant of household borrowing costs.

Swaps have been creeping up for some time and mortgage rates haven’t yet responded. This is partly because the mortgage market is in a stagnant phase post-Brexit, and banks are competing for what business there is by cutting their margins.

This can only last so long. In the not too distant future, I am certain, mortgage rates will have to climb. What will happen then? Much is made of the millions of mainly younger borrowers who, having taken on their first mortgage in the period since the crisis, have never experienced an increase in interest rates. Monthly costs will rise, yes. Borrowers will come off today’s rock-bottom fixed rates (five-year money for 2pc? Ten-year for 3pc? – it’s incredible) and, yes, they will have to pay more. They’ll either roll on to a higher variable rate or switch to a more expensive fixed-rate deal.

But let’s not get panic-stricken. There is slack in the system.

First-time buyers are where the danger lies and this is where doom- mongers have been sowing fear. But the statistics don’t bear them out.

In late 2007, arguably at the height of the excess that gripped the mortgage market ahead of the crisis, first-time buyers earned an average £35,000 and borrowed an average £117,000, which was typically 90pc of their property’s purchase price.

Today’s first-time buyers earn £40,000 and borrow £132,000, which is 84pc of the property price.

Interest rates are crazily low today and were higher then, but repayments today work out at 18pc of the average first-timer’s income, while in 2007 they were 25pc. So to get back to the same level of affordability as in 2007, mortgage

Even firsttime buyers can afford a rate rise