In less than a year, interest rate hikes have gone from an expected 1.5% to an anticipated peak of 4.75%. It's a big shift in a short space of time, but what does it actually mean for households across Wales?
For one broker in south Wales, he's been "flat out with people panicking" since the Bank of England announced rates were going up. Ian Rogers, owner of C A Mortgage Services Ltd in Blackwood, said people would have to cut their cloth accordingly in the face of rising interest rates which are expected to reach 4.75% by the end of the year. However, some analysts believe they could rise further to the 6% mark, with massive implications on mortgage affordability for thousands of households across the UK.
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Rising mortgage interest rates will pile pressure on UK homeowners at a time when soaring bills for energy, food and fuel are blowing holes in household budgets across the country. While most borrowers will have protected themselves from the immediate impact of any rate rise by opting for a fixed-rate mortgage deal, there's an estimated 300,000 people due to reach the end of their fixed rate period in this quarter and a further 375,000 in the next quarter.
Mr Roger's advice is plain and simple: don't delay in arranging a new mortgage if you're coming to the end of a fixed rate mortgage. "Every time we do a mortgage for people it will have an example of how if rates go up it will affect monthly payments," he said.
"What I always tell people, especially young people, where we've been in the last seven to eight years rates have tumbled down to almost zero which is almost unsustainable. People have had it really really good. We're finding now people who are now within a year of finishing their fixed rate are panicking."
Those who've stalled are now paying an extra £100 more on their monthly repayments than they were two months ago, he said. And the standard variable rates that many mortgages revert to after fixed periods end are heading "way beyond 6%". He cautioned: "If they aren't doing anything about re-mortgaging, there will be a massive hike."
The average mortgage in south Wales has gone up "tremendously" over the years, said Mr Rogers, who has more than 20 years experience in the brokerage industry. The average mortgage is around £170,000. If interest rates jump from a fairly average 2.1% to 6.1%, monthly repayment costs on borrowings of £100,000 go up more than £200.
The people in "real danger" are those with mortgages of £260,000, he added. A typical 25-year mortgage term at 2.1% would mean monthly payments of £1,100. But if rates surge to 6.1%, those payments jump to £1,691. That's basically an extra £600 to find every month, Mr Rogers said.
The table below shows the monthly repayments for two property values, based on a 25-year mortgage term and a 10% deposit. They do not include any additional fees including arrangement fees, house insurance or life insurance.
Mr Rogers doesn't think the rate rise is a "long term thing" but does caution that over the last 25-year period, the average interest rate stands at around 5-6%. But it's not so much interest rates that matter but affordability, he said.
For those with just a few years left on their mortgage term, rate rises "don't make much difference", he said. "That's because people are paying off more capital than interest," he explained.
"What I find worrying now is we've just had this housing boom in south Wales where property prices have gone up quicker than perhaps anywhere else in the UK. Two years ago a valleys terraced house would go for £100,000 or less. But now some of them are £160,000, if not more. I do expect it to level out. I read that last month house prices had already dropped off by 1%."
It's not uncommon to hear the typical refrain that while a rise in rates might be tough for some households, it’ll be nothing like what happened in the 1970s, 80s or 90s when rates hit double digits. But to focus solely on interest rates gives a misleading picture: what matters is not just the rate but how much people are borrowing and - equally important - how high their disposable income is versus those payments.
One commentator has tried to calculate what this actually means and after adding debt burdens, incomes, mortgage terms and mortgage rates into the equation has come up with an estimate of the "equivalent" interest rate. In other words, the actual burden of interest rates over time.
These calculations by Sky journalist Ed Conway show that in 1980, the official Bank of England interest rates were on average 14.2%. But because people were much less heavily indebted, because their incomes were much higher versus their repayments, that was, in affordability terms, equivalent to 3% in today’s interest rates
An increase to 4.75% would take us up to levels similar to just before the financial crisis and if rates went up to 6% it would make the mortgage burden very similar to the early 1990s - which precipitated the worst housing crash in modern history.
Of course not every household has a mortgage. But those who do may be in for a shock when they re-fix. That's what Mr Rogers is finding now. Analysts predict that the number of households due to re-fix their mortgages will peak at the very moment when, if market curves are to be believed, Bank of England interest rates will rise to 6% or possibly beyond.
Mr Rogers is adamant that what's happening now is "not a financial crash". He added: "It's just a number of different factors going on at the same time."
Whatever the reason however, it does mean many buyers and homeowners are looking at significantly reduced options when it comes to mortgaging their properties. Many lenders are now demanding larger arrangement fees in order for people to secure the best rates but Mr Rogers said that fee is often added on to the mortgage term and people simply end up paying interest on this too.
"Interest rates are changing almost on a daily basis," he said, adding it makes life harder at the moment but he's adamant that things will "settle down".
Mortgage products for fixed rate terms are starting at 5-6% said Mr Rogers while rates are much lower for tracker rates. Which product is right for each borrower comes down to how much of a risk taker they are, he explained.
"People want the cheapest rates," said Mr Rogers. "People normally try their hardest to pay the mortgage first. And you find they will start not paying other things, like life insurance and house insurance. Those are two disaster scenarios.
"And if people aren't going to be able to afford gas and electricity and default on payments then that will appear on their credit files. That means we'll have to look at sub-prime lenders for mortgage products. Although their rates are not that bad actually."
"People have got to be very careful and cut their cloth accordingly," he added. He thinks households with expenses such as cars on lease hire will end up getting rid of them. "We've had it too good for too long. People should work out their affordability based on 6%."
Mr Rogers is adamant that people will still be able to find a mortgage product to suit them - he bought his first house with a fixed rate at 9.5%. One thing he thinks banks need to do is bump up savings rates. So far, the majority of savings rate are still languishing at 0.1%. He said: "What's going on? Why aren't they [the banks] passing these interest rates on?"
What will inevitably end up happening is those borrowers with 20 years left on their mortgage will end up re-mortgaging to 25 or 30 years to make the repayments affordable. But that doesn't have to be a permanent thing, he said. "We have to be careful about elongating debt for affordability," he added.
"Probably we'll see people piling things on to credit cards again which really isn't good," he continued. "But anything more than £2,500 on credit cards is seen as a lifetime loan. And the closer you get to your credit limit the more it affects your credit score."
Among new buyers, 19 out of 20 (95.5%) are taking out a fixed-rate mortgage, according to the Financial Conduct Authority, while 17 out of 20 mortgaged homeowners have fixed their rates. By opting for fixed-rate mortgages, borrowers are seeking to lock in rates in expectation of further rises later. But the costs of this type of deal are rising fast, too. Borrowers now looking for another offer as their fixed period comes to an end will face much more expensive terms. Average rates on a two-year fix have nearly doubled from 2.24% a year ago to 4.24% this week, according to finance website Moneyfacts.
Not only that but banks and building societies are rapidly paring back the number of home loans they offer. Over 500 deals were pulled from the market in the month to September, Moneyfacts found. There are now 1,425 fewer deals available than at the beginning of December 2021.
If you find a rate that you like it’s worth securing it quickly because it will not be around for long, Mr Rogers said. To get more stories like this straight to your inbox, subscribe to our Wales Matters newsletter here.
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