A year after former prime minister Liz Truss was forced to sack her chancellor Kwasi Kwarteng after market turmoil drove the pound down and interest rates up, the real cost of that new equilibrium has become a reality for millions of British homeowners.
When mortgage advisor James Bull was choosing his own deal in 2021, the difference in payments between a two-year and a five-year fixed rate was tiny – about £20, to be precise.
It seemed too much to him at the time. “I thought, 'I am not paying that',” he told The National.
So he opted to fix in for just two years, gambling on the continuation of historically low rates that had gone on so long they had become normal.
“That’s just what everyone thought at the time. But obviously that has proven to be really incorrect," he said.
Interest rates started climbing at the beginning of 2022, as the Bank of England began its wrestle with inflation.
Mr Kwarteng was sacked on October 14, 2022 after he announced a tax-cutting mini-budget a few weeks earlier that sought to stimulate the economy even as the bank was trying to quash demand. The punish peak in market rates may have seemed a blip when a steadier leadership team of Rishi Sunak as prime minister and Jeremy Hunt, Mr Kwarteng's successor took over.
In reality the pressure from the market continued into 2023 as the Bank of England sought to recover its authority. After 14 consecutive increases, the escalator of official rate rises finally came to a halt last month after the Bank of England left interest rates unchanged at 5.25 per cent in September.
Mr Bull’s current deal runs out in January, but like many others he secured his new rate six months ahead.
And that means, in the new year, his mortgage repayments will go from £700 a month to £1,150 – a leap of £450 – or 2,150 per cent more than the £20 a month more on the five-year fixed deal he considered too much at the time.
“I did contemplate whether to move and buy something smaller. But in the end we decided to stay put.
“It probably just means that in the meantime there might be other areas we might have to cut back on.”
And he is by no means the only one.
Interest rates on new mortgages are now more than triple their level in early 2022, when Mr Bull bought his house.
“Since December 2021 we’ve seen the largest interest rates since 2008. This is leaving people in a mess,” said Christian Duncan, the managing director at Manchester Mortgage Centre.
The rise in rates represent an increase of about £201 per month per £100,000 outstanding, in interest alone, he added.
Although the bank recently paused its increases, rates are expected to remain on the high side for many months to come, possibly even into 2025, when some experts say they may start to fall back to about 3 per cent.
That means higher interest rates are going to become the norm for many more people who may not yet have experienced them.
“They might go maybe down a little bit next year, down to the 5 per cent mark or 4 per cent,” Mr Bull said. “But I think the days of the 2 per cent deals, or sub 2 per cent deals are definitely gone, unfortunately.”
An estimated 2.5 million homeowners will reach the end of their fixed-rate deals this year and next alone.
But how much of a problem will it be, really?
Experts say unless their circumstances have changed, most people should be able to afford the increases because mortgage affordability has been stress-tested for some time.
“Basically as a broker we do a fact find with a client and we take all the details of their circumstances, salary etc. and then every single lender has an affordability calculator.
So we would plug the client’s details into the affordability calculator and that will give a result of what that particular client can borrow,” Mr Bull said.
“But in their affordability models lenders have had to stress test how much clients can borrow.”
That means in the years when rates were low, lenders had to account for the fact that rates might rise in future and test whether they could still afford the payments if interest rates were to rise 2 per cent or 3 per cent higher.
So even if rates went up, the amount they were lending would still be affordable.
“Obviously now rates are higher from the start, lenders have to stress test it to an even higher level than what they did before,” Mr Bull said.
“So if rates were about 2 per cent they might have to stress it above 5 per cent. With rates at 6 per cent they might have to stress it above 9 per cent.”
The result is people can still get mortgages, but they cannot borrow as much and they have to put down a bigger deposit.
“The whole idea of stress testing is that people would be able to afford it even if rates went up,” Mr Bull said.
“But obviously it’s just going to be very uncomfortable for them if they have hundreds of pounds more going out for mortgage payments, they will have less to spend on something else.
“You live to your means.”
Mr Bull takes a note of when each of his clients need to start looking around for new deals, which is generally no more than six months before the current one runs out.
When rates are low, he is usually the one who has to contact them with a reminder.
That has changed in recent months.
“What’s happening now is people are coming to me sort of 12 months before the deals and kind of do it now. But six months is the cut-off, really. So I have had to tell people they just had to wait,” he said.
“That’s the only thing I have been able to say to them. It’s in my diary and I will contact you when the time is right.
“My current clients are coming to me earlier and earlier because they are worried.”
Some recent examples of remortgages he has completed include:
Family home, five-bed terrace house in Berkhamsted
£750,000 mortgage, capital repayment
Previous rate and payments: 2.48 per cent, £2,848 monthly
New rate and payments: 6.27 per cent, £4,423 monthly
Original deal taken March 2021, new deal reserved in August 2023 to take effect in January 2024
“They were one of the ones who contacted me really early because they were worried. They had seen it in the press and they knew they had a relatively large mortgage and they knew what was coming," Mr Bull said.
“It's the same as everyone else, really. They can afford it but it’s definitely going to make life a little less comfortable than what it was before. They have taken it out for two years only."
Family home, three-bed terrace house in Walthamstow
£520,000 mortgage, capital repayment
Previous rate and payments: 2.15 per cent, £1,916 monthly
New rate and payments: 4.1 per cent, £2,471.16 monthly
Original deal taken March 2021, new deal reserved October 2022 to take effect April 2023
"They got lucky and we reviewed theirs quite early in the year, in January. It's just the luck of the draw on that. The earlier we got in there for people, the less bad it has been," Mr Bull said.
Investment property, three-bed apartment in Bow, London
£260,000 mortgage, interest only
Previous rate and payments: 2.8 per cent, £623 monthly
New rate and payments: 6.19 per cent, £1,335 monthly
Original deal taken in September 2021, new deal reserved June 2023 to take effect in October 2023
“He is a landlord. I think he’s getting good rent for it, but the trouble is before he was making a profit on it and now his rent is just covering his mortgage and not much else,” Mr Bull said.
Family home, three-bed mid-terrace house in Basildon
£280,000 mortgage, capital repayment
Previous rate and payments: 2.55 per cent, £1,239 monthly
New rate and payments: 5.69 per cent, £1,726 monthly
Original deal taken October 2020, new deal reserved August 2023 to take effect January 2024
"If I remember rightly I contacted them bang on six months before their deal was due to end. And had we not reserved the rate so early for them it could have been worse," Mr Bull said.
Investment property, one-bed flat in Woolwich
£160,000 mortgage, interest only, buy to let
Previous rate and payments: 2.7 per cent, £371 monthly
New rate and payments: 6.09 per cent, £810 monthly
Original deal taken August 2021, new deal reserved July 2023 to take effect August 2023
"This is a landlord who has 20 properties. Practically all of his mortgages are on two-year fixed rates and they are kind of all rolling off over the next two years," Mr Bull said.
"He's kind of swallowing it up so far. He's not happy about it but he's still got a lot more rent coming in than he is paying in mortgages. So he is fine. But he is hoping rates come down as he still has others to roll off."