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Look For Breathing Space As Mortgages Are Set To Rocket For Millions

A crisis is looming for more than two million homeowners who are coming to the end of fix rate mortgage deals and could see their costs rocket by as much as 80%. The Council of Mortgage Lenders says that those are the numbers of people coming to the end of two year old deals in the next eighteen months.

Last week the Bank of England pushed up interest rates for the fifth time in a year, to 5.75%, their highest level for six years, and mortgage interest rates have not been slow to follow upwards.

The Mortgage Advice Bureau estimates that in 2005 around 1.3m homeowners fixed their rates at nice low rates, but now they’re going to start facing much higher mortgage repayments.

One example for comparison is Alliance & Leicester. In July 2005 a fixed rate of 4.44% was available for an arrangement fee of £395. With that deal ending now, borrowers are faced with Alliance & Leicester’s standard variable rate of 7.89% - and that is expected to go up again after last week’s base rate rise. Anyone with a £100,000 mortgage will be faced with the prospect of finding another £291 per month.

If they decided to switch from Alliance & Leicester the best they could find would be Skipton Building Society’s two-year fixed at 5.39% with an arrangement fee, staggeringly higher at £1,599. Even this competitive rate would add more than 20% to the costs for a homeowner.

The advice for anyone coming off fixed rates in the foreseeable future is to start planning their budgets now. One quarter point rise might not have been too painful, but five of them have heaped misery onto homeowners, and the base rate is now forecast to reach 6% by the end of the year.

Over 7.4 million bill payments have been missed in the UK in first half of 2007, covering the whole range from utility bills through mobile phones to council tax demands. Interest rate rises have forced something to give under the strain. The advice is to avoid missing bill payments if at all possible.

Between 2004 and 2006 repossessions almost trebled, from 6,030 to 17,000. They are expected to increase again in 2007 after the rash of rate rises. The bare numbers are nowhere near as bad as the 75,000 of 1991, but each one represents a family disaster.

Lenders are being urged to take a sympathetic view towards struggling borrowers, but homeowners have to take their own steps to give themselves some breathing space.

Some options might be available, like payment holidays. It is also best to arrange things with a lender beforehand rather than just miss payments, which will contribute towards a poor credit rating. Another option is to switch to an interest-only mortgage from a repayment, at least for a short time. This will reduce payments and lenders should allow this for a small charge. The big disadvantage is that there will be no contributions towards paying off the original loan on an interest-only mortgage, so you would be left needing to pay that back at the end of them term. So such a switch should be temporary if possible.

Tom Smith
13th July 2007

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