One in 10 could be mortgage prisoners
According to the independent think tank around 700,000 households are at risk of being ‘mortgage prisoners’ and ‘highly geared’, the latter meaning their mortgage repayments could eat up at least a third of their disposable income.
This vulnerable group may not be able to renegotiate their borrowing due to having less than 5% equity in their home, while if they are self-employed or have interest-only mortgages they are considered less attractive to mortgage providers.
People in this position could be forced to repay their lender’s standard variable rate, leaving them especially exposed to an interest rate rise.
The Resolution Foundation expects interest rate to climb from 0.5% to almost 3% by 2018.
Matthew Whittaker, chief economist at the Resolution Foundation and author of the report, said: “Many borrowers have enjoyed spectacular savings over recent years, with mortgage rates falling to historic lows, and most will be able to ride the tide of gradually rising interest rates.
“But for around one in four, even modest rate rises could create financial difficulties.
“Those at greatest risk are members of this group who also find themselves unable to access the best deals in the market today.”
A total of 2.3 million households, accounting for more than a quarter of the UK’s 8.4 million mortgagers, could face unaffordable repayments by 2018, however many within this group could refinance to improve their circumstances.
Similarly if circumstances stayed the same 3.5 million people could become mortgage prisoners by 2018, yet many of these who are self-employed on high incomes for example could negotiate new terms.
Low income households suffer the greatest affordability problems, as a quarter of those spending over a third of income on mortgage repayments are at the bottom 10% of income distribution.
Mortgage holders in the East and London are at most risk, as 35% could be highly-geared by 2018, compared to 18% in Scotland and 19% in Yorkshire and Humber.
Borrowers are at most risk in Northern Ireland and London, where 16% and 13% of mortgages are projected to be highly-geared in four years time.
Whittaker added: “Almost one in 10 households are doubly exposed: facing the prospect of their mortgage becoming increasingly unaffordable in the future and with the market offering them limited, if any, choice today.
“There is still a window of opportunity to think creatively about the best way of reducing the risk to this vulnerable group while we still have ultra-low interest rates.
“But that era is coming to an end relatively soon and the legacy of easy credit and the associated debt-overhang still has to be reckoned with.
“Financial institutions and policy-makers must consider now how best to minimise the scale of the adjustment problems these families face when interest rates start to return to normal.”
The expected rise in interest rates, which most analysts think will start in early 2015, comes at the same time as the MMR means lenders will set more stringent conditions on borrowing.
Although MMR allows lenders more latitude in arranging new terms with existing borrowers it is not clear if lenders will take advantage of these provisions.
The study is said to evidence the end of a ‘golden age’ for mortgage borrowers, especially with Bank of England governor Mark Carney recently raising concerns with the fluctuating nature of house prices.