Spectre of interest rate shock looms large

More than a million households on fixed rate mortgage deals are thought to be bracing themselves for interest rate shock when they come round to remortgaging later this year.

Figures from the Office for National Statistics (ONS) released yesterday show 1.4 million households are due to remortgage fixed rate deals in 2023.

The majority of fixed rate mortgages in the UK (57%) will come up for renewal this year with most fixed at interest rates below 2%.

HIGHER

Those deals that are due to mature through the course of 2024 will be from 2-year fixed rate deals made in 2022 and 5-year fixed rate deals made in 2019, when mortgage rates were generally higher than 2%.

In the first quarter of this year some 353,000 fixed rate mortgages will have to be renewed.

The ONS says that while interest rates have been increasing since the start of 2022, most fixed rate borrowers have been insulated from those increases, as the majority were fixed at interest rates below 2% and are still within their fixed-rate period.

When borrowers remortgage in the near future it is likely to be at a higher rate of interest.

The Office of Budgetary Responsibility (OBR) expects Bank Base Rate to peak at 4.8% by the end of 2023.

IMPACT

The Bank Rate is the rate at which the Bank of England pays the commercial banks that hold deposits with it. The Bank Rate in turn impacts the rates that lenders use to set mortgage rates.

The OBR forecasts that the Bank Rate would rise from 1.6% in Quarter 3 2022 to 4.8% in Quarter 3 2023 and 4.5% in Quarter 3 2024.

Gary Smith, Financial Planning Director at wealth manager Evelyn Partners, says: “Households must be prepared for increased outgoings this year, and remortgaging to substantially higher rates will for many be a significant part of that. Those who have deals expiring this year face a difficult choice as to whether to fix again or risk a variable rate deal.

This could rapidly become unaffordable for many people – particularly if they still have a high loan to value.”

And Karen Noye, mortgage expert at Quilter, adds: “Those with a fixed rate mortgage coming to an end this year will likely have been shielded from the rise in interest rates so far as they had locked in at a time when interest rates were below 2%.

“However, this now means they could be facing a significant increase in their monthly payments when they come to renew, and this could rapidly become unaffordable for many people – particularly if they still have a high loan to value.

“And this is all in addition to eye-watering heating bills and food costs soaring, which will serve to make this winter in particular and the rest of this year difficult for millions.”