Time bomb for 1m mortgages

By Jane Croft, Retail Banking Correspondent

Published: June 1 2007 20:15 | Last updated: June 1 2007 20:15

Up to a million homeowners could see their mortgage repayments jump by almost a third in the next 12 months as they approach the end of cut-price mortgage deals.

Four interest rate hikes in the past 10 months mean that borrowers are now facing a ticking time bomb as they near the end of two- and three-year fixed-rate mortgages taken out in 2005, which are now poised to shift on to more expensive rates.

The problem is also backloaded to the end of this year because there were a number of good deals around in the latter half of 2005 after the rate cut in August of that year.

About £200bn of mortgages – approximately 20 per cent of the UK mortgage market – moved onto fixed-rate deals in 2005, according to new research by analysts at Credit Suisse.

Credit Suisse estimated a large chunk of these mortgages would be written on two- or three-year fixed-rate deals because these were the most commonplace in the market.

Jonathan Pierce, banks analyst at Credit Suisse said these fixed-rate mortgages were now coming to the end of their deals and up to a million households could face higher payments.

“For some customers we see a 25-30 per cent increase in interest payments,” he said.

He said the payment shock could lead to higher arrears as more consumers who might have overstretched themselves to get onto the housing ladder struggled with the increased payments.

In some cases consumers could find themselves paying hundreds of pounds more per month.

Back in 2005, fixed-rate mortgage deals were around 4.49 per cent but comparable fixed-rate deals have now risen to just under 6 per cent, according to Moneyfacts, the financial information group.

This could mean a homeowner with a £125,000 interest-only mortgage would see their monthly mortgage payments jump from £457 per month to £612 per month.

Those who had a two-year fixed-rate £300,000 interest-only mortgage in 2005 would see payments rocket from £1,100 to £1,470.

Consumers can find cheaper fixed-rate deals on the market – but most of these now charge large upfront fees of £1,000 or even 2.5 per cent of the value of the mortgage.

If consumers coming off fixed- rate deals do nothing, they will automatically be moved to their lender’s standard variable rate, which is around 7.5 per cent.