Rate rises hit wealthy homeowners hardest

Borrowers with large amounts of equity will suffer the most and may be forced to delay retirement plans, reports Melissa Lawford

Wealthier and older homeowners with large amounts of equity will be hardest hit by jumps in mortgage repayments, experts have warned, as an era of ultra-low rates draws to an end. Many borrowers may be forced to delay retirement as a result, while mortgage arrears will rise.

Costs for those borrowing with 25pc deposits or more will substantially rise this year, following this week’s increase in interest rates. However, those on 5pc deals – who never enjoyed the lowest rates – will see repayments fall.

Second-steppers could see monthly bills rise by more than a third when they remortgage. Owners of £1m homes could record a near 10pc increase in repayments, according to analysis by Hamptons, an estate agent.

On Thursday the Bank of England increased the Bank Rate from 0.25pc to 0.5pc. This is forecast to reach 1.25pc by the end of 2022, according to consultancy Capital Economics. This will push up mortgage costs dramatically, just as borrowers shoulder a 54pc rise in energy bills and inflation reaches 7.25pc by April.

Will Rice of Generation Home, a lender, said: “The increased costs will undeniably have an impact on affordability and homeowners’ ability to pay their mortgages. It is going to add up to a very big strain on very typical families. Undoubtedly, we will see an increase in arrears.”

Affluent homeowners will take the biggest hit. A buyer who purchased a £208,007 property in December 2020 – the average property price for first-time buyers at the time – with a 25pc deposit on a two-year deal will pay £204 more each month when they remortgage. This is 36pc more than they pay now. Those who purchased homes worth between £500,000 and £1m, also with 25pc deposits, will see repayments rise by 10pc.

Chris Sykes, of mortgage broker Private Finance, said older homeowners and parents would suffer most. “Those with more equity will take more of the brunt. This is because low- deposit deals were so expensive during the pandemic,” he said.

“It’s not just rich people, it’s people in their 50s who still have 40pc deposit mortgages – parents with children, who have already been impacted by the rising cost of living.”

Older homeowners typically try to keep mortgage repayments down when children are living at home and then increase how much they pay off in the final 10 years, to retire debt free. However, Mr Sykes said many would be unable to do this given rising costs.

“If the rates are a lot higher, some might have to work a year longer before they can retire,” he added.

Repayments for first- time buyers on 5pc mortgages will fall by 17pc, the analysis showed. This is because rates on riskier loans are lower than in 2020, despite Bank Rate increases, as banks have gained confidence as they emerge from the pandemic.

Low- deposit homeowners will also benefit from access to better deals as their loan falls in proportion to the rising value of their house.

In 2020, low- deposit first-time buyers locked into rates averaging 4.44pc, according to data firm Moneyfacts. The huge increase in property values has meant they now own 20pc of their homes. Someone who bought a £ 208,007 home in December 2020 with a 5pc deposit on a two-year deal can now remortgage with 20pc equity and pay just 2.69pc, Hamptons said. This would cut their monthly repayments from £966 to £800.

A first-time buyer with a 25pc deposit only paid 1.86pc in December 2020 but will remortgage at 2.66pc, Hamptons said. Although they also enjoyed house price rises, it has not been enough to offset the jump in interest costs.

Some homeowners have paid high early redemption charges to exit current deals and lock into long- term rates, according to Mr Sykes. He said a client who earned £500,000 per year, and had borrowed £1.5m on a five-year fixed rate, paid £60,000 in exit fees and locked into a new 15-year deal.