Penny Arrowsmith has recently come off a fixed-rate mortgage, on which she paid 2.79 per cent interest. As such, she's shopping around for a lender to give her a new deal. “We're looking at a minimum of 5.5 per cent to remortgage,” the 56-year-old marketing director living in Islington, north London, told <i>The National</i>. Until she finds a new deal, she's currently on a variable rate of 8.25 per cent, which means a “large chunk” of her income is swallowed up in mortgage payments. “So, I've cut costs – food shopping, for example. I budget like crazy and I don't think I'll be going on holiday this year,” she said. Ms Arrowsmith is not alone as more than a year of rising interest rates means a sudden increase in mortgage payments for those British homeowners coming off fixed rate deals. It's set to get worse. Analysts predict the Bank of England will <a href="https://www.thenationalnews.com/business/economy/2023/06/16/expectation-of-uk-interest-rate-rise-sends-pound-soaring-to-new-heights/" target="_blank">increase interest rates </a>for the 13th time to 4.75 per cent on Thursday. On Tuesday, the average two-year fixed-rate mortgage jumped to 6.07 per cent, moving closer to the 14-year highs reached at the end of last year, according to research by Moneyfacts. Last week, the average five-year fixed-rate deal climbed to 5.72 per cent, after moving above 5.5 per cent for the first time since January. Rates are approaching the levels offered following the disastrous mini-Budget of the short-lived Liz Truss government last October, where a typical five-year fixed rate peaked at 6.51 per cent. This is all happening against a backdrop of high inflation and a lacklustre economy, which has avoided a technical recession but will struggle to eke out more anaemic growth this year, according to reports. Additionally, the UK gilt market has had a few chaotic weeks, as the cost of government borrowing approaches 5 per cent. It has prompted some of Britain's largest lenders to withdraw mortgage products. Between last Friday and Tuesday, the product count fell from 4,923 to 4,641. “I'm concerned because we've seen a lot of products removed from the market,” Ms Arrowsmith told <i>The National</i>. Widespread <a href="https://www.thenationalnews.com/world/uk-news/2023/04/28/imf-urges-european-central-banks-to-kill-the-beast-of-inflation/" target="_blank">uncertainty over inflation,</a> and therefore the future level of interest rates, is behind the woes. Many first-time buyers are struggling to afford mortgages, as are those coming off fixed-rate deals and looking around to refinance. “Market expectations that interest rates are going to rise even higher, and stay higher for longer, are having a major effect on the mortgage market, with deals being pulled and replaced with new higher-rate mortgages, said Simon Pittaway, senior economist at the think tank Resolution Foundation. “This means the mortgage crunch is now on track to increase bills by £15.8 billion, with those remortgaging next year set to see their costs rise by £2,900 on average.” However, Craig Fish, a mortgage broker with Lodestone Mortgages, said some of the gloom around the market is overdone and that there is some scaremongering over the 6 per cent mortgage figure. “While true, what the reports don’t say is that this will include specialist lending products, which are inherently more expensive,” he said. “For the average person looking for a mortgage, the two-year fixed rate is likely to be in the mid-5 per cent bracket. “I feel that the pressure to bring inflation back to the required level is just putting too much pressure on the [Bank of England's rate-setting] monetary policy committee to increase interests, which is of no benefit to anyone. “Instead, the government should cut them some slack, focus more on the future of the economy and increase the timeline for returning inflation back to the target level. “The future of the economy is a marathon, not a race.” Nonetheless, 1.4 million mortgage payers are due to come off their fixed-rate deals by the end of the year, with 400,000 in the next three months, according to the Office for National Statistics. Research by Moneyhub shows 35 per cent of people currently on a fixed-rate deal said they are concerned their payments will be unaffordable when they next remortgage. “Times are challenging for homeowners,” said Suzanne Homewood, managing director of Decisioning at Moneyhub. “Mortgage rates continue to rise to levels not seen since before the financial crisis and other essential costs are eroding financial buffers, leading to a complex situation and increased risk for both consumers and lenders. “It’s clear that there needs to be more support for those remortgaging or on tracker or variable rates who will be feeling the impact of rising monthly payments.” Prime Minister Rishi Sunak said on Monday, however, that there will be no extra help given to people who are struggling with mortgage payments. Speaking to ITV's <i>Good Morning Britain</i> programme, Mr Sunak said the government needs to “stick to the plan”. “I know the anxiety people will have about the mortgage rates,” he said. “That is why the first priority I set out at the beginning of the year was to halve inflation, because that is the best and most important way that we can keep costs and interest rates down for people.” Inflation in the UK is running at 8.7 per cent, but the latest figures for May will be released on Wednesday. The Bank of England expects inflation to “fall sharply from April” and should reach 5 per cent by the end of the year. However, inflation has routinely been described as “sticky” in the previous three months, meaning that it, and particularly food prices, continue to remain stubbornly high. But compared to former credit and mortgage crunches, this time could be more of a shock because of the comparatively higher number of people on fixed-rate mortgages. That means the difference between what they could be paying on a mortgage one month on a fixed rate could dramatically increase as soon as that fixed rate deal expires, even if they can get a new fixed deal. The chairman of NatWest Bank, Sir Howard Davies, urged the Bank of England not to raise rates this week. “In the past when we've had significant rises in interest rates – say, before the last financial crisis, '04, '05, '06 – the mortgage market in this country then was largely variable rate,” he told the BBC. “So, when the interest rate went up, by the end of the following month everybody was paying more on their mortgages. “Now, we have a mortgage market where most people are on fixed rate.” He said this means that it takes time for the increase to have an impact. “Therefore, when you put up interest rates, for a while you don't have much impact, because you only have an impact on the small number of people paying variable rate, and on the people whose fixed rates just happens to come up at that point for renewal,” Sir Howard said. “So, it's arguable that the interest rate rises that we've already seen have not yet fed fully through into the impact on consumer spending. “That, I think, is probably at the core of the argument why you could say that the Bank of England should wait a bit and see what happens when the full effect of this has gone through.” Mortgage prisoners are people who have been trapped in home loans with payments far above the Bank of England's base rate, by virtue of their circumstances changing. They are unable to switch mortgages to a better deal, even if they are up to date with their payments because most have a mortgage in a closed book of an inactive or collapsed firm as a result of the 2008 financial crisis. As a result of different definitions, it is unclear exactly how many mortgage prisoners there in the UK, but estimate range from 47,000 to 195,000. Most are left paying above-average rates, with some stretching into double figures. Another mortgage holder, Lucy, has been paying over the odds on her mortgage for 15 years and is now facing rates far higher than the base rate. Lucy is one “mortgage prisoner” and since the Bank of England started its current cycle of monetary tightening, things have become “very, very painful” for the former company director from Hampshire. “You've got to bear in mind now, that there are people out there with Northern Rock [the UK bank that went bust in 2007] who are paying between 11 and 15 per cent now,” she told <i>The National</i>. “While everybody else was enjoying 0.25 and 0.1 per cent interest rates, we were 5.25 per cent on top. We've been paying up to 8.13 per cent [recently].” Getting a fair deal for mortgage prisoners has not been easy. Last week, the Treasury rejected the notion of a cap on rates for mortgages held within closed books. “With a further impending Bank of England rate rise on the horizon, historic mortgage prisoners fear they will be trapped with rates of 10 per cent plus,” said Rachel Neale, lead campaigner with the UK Mortgage Prisoner Action Group. “We witnessed in the House of Lords the rejection by the Treasury of the cap on the rates of mortgages held within closed books. “This solution was the only one presented, which would have no cost to the Treasury or the taxpayer. “It would have given immediate relief to the 200,000 borrowers, and their families, who as a consequence of long-term financial trauma have suffered immeasurable mental and physical ill health, all caused by the irresponsible sale of mortgages to inactive lenders. “Unlike borrowers with active lenders, mortgage prisoners have no choice. Their options now are losing their family home, through the unrecorded home loss of selling or handing back the keys and moving in with family.” The crunch in the mortgage market is a direct result of the uncertainty on how high interest rates will go and for how long. Products will continue to be withdrawn as risk calculations are made, On Monday, TSB Bank became the latest lender to withdraw certain types of its two, three and five-year fixed house purchase and remortgage products from the market. Calls for government intervention are being led by the Liberal Democrats, who said the government needs to step in because anything else “will be a disaster for struggling families worried about losing their homes”. Leader Ed Davey called on Mr Sunak to set up a mortgage protection fund to fend off the spectre of people falling into arrears or losing their homes. He said Mr Sunak must “listen to those who need help and immediately end this mortgage horror show”.
