by Mark Johnston
Yet Another Timebomb!
Industry experts believe that many home owners faced a debt timebomb because they have failed to use the opportunity of record low interest rates, which have stayed at 0.5 per cent since March 2009, to reduce their mortgage debt.
It seems this new timebomb has been built with an incendiary combination of too high house prices and too low interest rates.
When rates are as low as they are now it makes sense to borrow as much as you can on the cheapest rate to get the biggest home you can afford, but there are a problems with this
A recent report has predicted nearly one in ten mortgage borrowers would have to take significant action if rates were to rise by just one percentage point.
Current figures reveal that taking all borrowing together (secured and unsecured), some 3.6 million households can be described as ‘debt loaded’; spending more than one quarter of their income on repayments despite the current low cost of borrowing.
Many of those home owners on repayment mortgages who have stretched as far as they can go to put a roof over their head, can not really afford rates to rise.
Therefore Sir Mervyn King, the Governor of the Bank of England has warned interest rates can not go back to normal any time soon, because of a generation that would not be able to afford their mortgages.
Research shows that the baby boom generation benefited from a steady rise in house prices, but this has then forced their children to borrow beyond their means to get on the property ladder.
This then means that many of those in their thirties and forties will now be left in an ‘unsustainable’ position if interest rates hit 3 or 4 per cent.
A rise in interest rates without a strengthening in income could significantly increase borrower distress and losses to banks.
So borrowers therefore need to make sure you can afford the repayments not just on a 3 per cent mortgage but also on a 6 per cent one.
Mark Harris, chief executive of mortgage broker SPF Private Clients, said “it is important that everyone considers how they will repay their mortgage, whether they are in their thirties or forties, or not,”
Some financial experts suggest that Sensible borrowers should now be trying to overpay their mortgages, using the money they are effectively saving each month.
David Hollingworth of mortgage broker London & Country, adds that “if you have not been doing this, you can protect yourself from rate rises by taking out a fixed rate mortgage. There are some very cheap deals currently available and a five or even a 10 year fix will give you some protection from rising rates over the medium to long term.”
Nevertheless home owners should have some cautioned against throwing every spare penny at the mortgage as it is equally important to have an easily accessible, rainy day fund as well.
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