New Research Suggests That Borrowers Are ‘Rate Spoilt’

by Mark Johnston

Worries are growing that borrowers do not understand the true cost of owning a home due to the sustained low interest rates. The new research has suggested that borrowers have become used to the 0.5% base rate and have planned their financials around this.

The concern is that any sharp increase in interest rates would have a profound effect on home owners. Those that are only just managing may find it impossible to keep up with mortgage repayments. This in turn could trigger a raft of repossessions which could cause another financial crisis.

The research showed that the average homeowner would only consider a fixed rate mortgage if the rate came down as low as 3.3%. This is probably due to cheaper tracker and variable deals being available. But these cheaper deals are open to sharp increases in the Bank of England decides to increase in the base rate to combat inflation.

Even more surprising was that 16% of those surveyed said that they wouldn’t even consider a fixed rate mortgage unless it had a rate lower than 2%. This reinforces the idea that borrowers do not expect interest rates to increases and as a result do not value the protection that fixed rate mortgages provide.

Expecting fixed rate deals at this level is very worrying especially when looking at what is actually available. There are very few fixed rate mortgages available for less than 3.3%. In reality there are only three, one is a three year fixed rate whilst the other two and two year fixed home loans. All three require fairly substantial deposits to get the rates.

When looking across the market, the average fixed arte is around 1% higher than borrowers are expecting (4.4%) whilst three year fixed rate deals are around 5% with five year versions being a lot higher.

Experts suggested that borrowers had lost touch with the real cost of a mortgage due to the sustained historic low of the current interest rate, they even went as far as calling current borrowers a “rate-spoilt generation” as they had become too comfortable with the current situation.

The same research was carry out a couple of years ago and told a very different picture. Those surveyed said that they would take a fixed rate mortgage out at 4%, whilst fixed rate mortgages at the time were on average around 6%.

Many borrowers have chosen to remain on their lenders standard variable rate as at around 2.5% its much more cost effective than the deals that are being offered by banks and building societies. Because of this very few people are signing up to new fixed rate deals once their current deal has expired.

Karen Barrett, chief executive of the company who commissioned the research said: “With the base rate now remaining at a record low of 0.5% for 21 months, possibly 22 months after Thursday’s base rate decision, our tracked research shows this has had a dramatic effect on homeowners’ rate expectations. Their ideas of what is a reasonable fixed rate mortgage have become distorted in the low interest rate environment, and they need to ensure that their mortgage expectations are realistic. While record numbers of homeowners remain on their lender’s SVR instead of tying into another deal, and with many predictions for rate rises during 2011, homeowners need to be alert to ensure they don’t miss out on getting the best deals before it’s too late.”

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