Financial shock
I am writing a piece for The Sun's money section on the financial shock borrowers face when remortgage off five-year fixed rates.
Please can you provide some commentary on this.
Thanks!
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With rising costs across the board, mortgage payments are still increasing for those coming off low rates. With the current global political issues and knock on economic fallout out, they are likely to see higher rates than recent times. Generally, the regulatory stress testing has done a good job. As much as borrowers don’t like the pain, most are well placed to deal with it. There has also been plenty of time to prepare. Of course, there will be some who fall through the gaps and it’s important to get the right advice from a good on what your options are. Most importantly, don’t bury your head and ignore it as this can escalate a problem further.
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The lucky bunch who secured a 5 year rate right at the very end of historic low interest rates are now experiencing the sock most people went through 3 years ago.
The most common interest rate jump we have seen is more than 200% from somewhere around 1.75% to around 4%.
This leaves borrowers with a number of options. Borrow over a longer period to reduce the monthly impact. Make savings and cut backs elsewhere in their budget. Or use their savings to reduce the borrowing amount.
What we are seeing most is that people are using this opportunity to actually borrow more, mostly for building work to remain in their property for longer rather than moving.
This seems to be affordable on the basis wages have risen over the past 5 years so for a two income household, there is a greater ability to borrow more.
The most common interest rate jump we have seen is more than 200% from somewhere around 1.75% to around 4%.
This leaves borrowers with a number of options. Borrow over a longer period to reduce the monthly impact. Make savings and cut backs elsewhere in their budget. Or use their savings to reduce the borrowing amount.
What we are seeing most is that people are using this opportunity to actually borrow more, mostly for building work to remain in their property for longer rather than moving.
This seems to be affordable on the basis wages have risen over the past 5 years so for a two income household, there is a greater ability to borrow more.
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Those who have benefited from their long term cheap rates have had nearly 5 years to prepare for this moment, but it will still be a shock to the finances. Most borrowers will see their interest rates at least double, but that doesn’t mean their payments will do the same unless they have an interest only mortgage. The opportunity to review wider market options, switch borrowing to interest only or stretching the overall term are all good remedies to mitigate any hike in costs, but arranging a new mortgage up to 6 months before that cheap rate finishes will help reality set in for sure.
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Coming off a five-year fix can be a real financial shock because people naturally shape their lives around the money they have left each month. When that mortgage payment suddenly jumps, it is not just a higher bill, it can feel like the whole budget has been thrown off course. If someone is also carrying unsecured debt like loans or credit cards, rolling that into the mortgage can sometimes reduce the monthly pressure and create breathing space. The trade-off is that while monthly payments are often lower, the total interest paid over time can be higher. This of course, is a move that needs to satisfy affordability and mortgage stress tests, is loan to value sensitive for many lenders, and if these fail, can remove this option from the table altogether. It’s important to seek professional advice as soon as you can.
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Those coming off 5yr fixed deals have been living in fear for the last few years. Knowing that their dooms day was approaching and their ultra low rate was going to vanish. I’m seeing very little shock these days, just a reluctant acceptance of the inevitable.
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As household shocks go, rate shock is up there among the top that you wouldn’t wish for. Such a large increase to a household budget can derail plans and intentions permanently. Any changes you make to lessen the blow requires careful planning to make sure it won’t cripple the budget and keep you head above water. Take advice if you need to and see if there are ways of reducing the impact. You could possibly restructure the mortgage or other financial commitments. Review what you have going out and think do you really need to spend so much in other areas. What could you re allocate to the more pressing need. It may be possible to consolidate some personal debt but caution should be taken as this can often end up costing more in the long run and represents a greater risk to your home.
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Coming off a five year fix is a shock because households got used to a predictable, artificially low payment, and then the reset arrives all at once. For many borrowers the new rate is not just ‘a bit higher’, it can be double or more compared with deals taken in 2020-2021, so the jump hits like a pay cut.
The risk is not just the headline rate, it is the trap doors around it: slipping on to an expensive SVR while you shop around, paying chunky arrangement fees that quietly raise the true cost, or shortening affordability headroom so one more bill increase pushes you into arrears.
Practical steps that help: start the switch process 3-6 months before the deal ends, compare total cost including fees, and ask what happens if you extend the term temporarily versus paying more now. For policy, the focus should be on clear, comparable pricing and early warning, not blaming borrowers for not predicting a rate regime change.
Source: https://app.newspage.media/news-alerts/financial-shock
The risk is not just the headline rate, it is the trap doors around it: slipping on to an expensive SVR while you shop around, paying chunky arrangement fees that quietly raise the true cost, or shortening affordability headroom so one more bill increase pushes you into arrears.
Practical steps that help: start the switch process 3-6 months before the deal ends, compare total cost including fees, and ask what happens if you extend the term temporarily versus paying more now. For policy, the focus should be on clear, comparable pricing and early warning, not blaming borrowers for not predicting a rate regime change.
Source: https://app.newspage.media/news-alerts/financial-shock