Two-year mort­gages ‘dan­ger­ous’ as prices weaken and rates rise

The Daily Telegraph - Your Money - - FRONT PAGE - Sam Mead­ows

Loom­ing in­ter­est-rate rises and a stag­nant hous­ing mar­ket mean first-time buy­ers with large mort­gages are at risk of be­com­ing “loan pris­on­ers”, in fu­ture trapped into pay­ing some of the high­est rates, mort­gage ex­perts have warned.

The most pop­u­lar mort­gage deals in­volve fix­ing rates for just two years. But a cool­ing hous­ing mar­ket and a back­ground of ris­ing bor­row­ing costs could mean that at the end of those deals bor­row­ers will not be able to re­fi­nance to a new, fixed rate. In­stead they could be forced to pay their ex­ist­ing lender’s high­est “stan­dard vari­able rate” or SVR, likely to be as much as twice the rate of their start­ing loan.

Those most at risk are bor­row­ers set­ting out to­day with small de­posits.

House price data pub­lished last month showed the first an­nual de­cline in Lon­don house prices in eight years – as the av­er­age value fell by 0.6pc. Hints from the Bank of Eng­land also sug­gest in­ter­est rates could rise next month for the first time in a decade.

Cal­cu­la­tions by Tele­graph Money re­veal the dan­gers of be­com­ing a “mort­gage pris­oner”. Chelsea Build­ing So­ci­ety cur­rently of­fers a two-year fixed mort­gage for a buyer with a 10pc de­posit at a rate of 1.83pc.

A bor­rower tak­ing out a loan of £180,000 on a £200,000 prop­erty would make monthly pay­ments of £748. How­ever, if they found them­selves un­able to re­fi­nance and were forced to pay Chelsea’s SVR of 4.74pc, their monthly pay­ments would jump by al­most £300 to £1,025.

Pro­vided they have eq­uity in their prop­erty of at least 10pc – and pro­vided the mort­gage mar­ket is as com­pet­i­tive as it is to­day – they could re­mort­gage else­where to an­other, bet­ter rate. But if the value of their home has fallen and so eq­uity re­duced, they may be stuck on the higher SVR.

Ray Boul­ger, of bro­kers John Char­col, said for some buy­ers this means they should con­sider fix­ing their deal for five or even 10 years.

He said: “The po­ten­tial prob­lem [with a short-term fix] is that house prices fall – in which case you don’t have the eq­uity to re­mort­gage. The other prob­lem is that your per­sonal cir­cum­stances might change so you can’t get a mort­gage, that’s the risk.”

The buyer in the case above would pay sig­nif­i­cantly less over five years on a fixed deal than if they re­verted to an SVR af­ter year two. The rate on a five-year deal with York­shire Build­ing So­ci­ety is cur­rently 2.49pc – mean­ing monthly pay­ments of £807.

This means, over five years, the buyer would pay a to­tal of £48,420. If they fixed for two years with Chelsea and then paid the SVR they would pay £54,852 – around £6,000 more.

Mr Boul­ger said some­one bor­row­ing 90pc eq­uity may be bet­ter with a longer fixed deal. “There are some who will put a lot of value on cer­tainty, even if the rate is higher,” he ex­plained.

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