November 24, 2022
  • November 24, 2022

Remortgaging this year will wipe out a quarter of your disposable income

By on July 10, 2022 0

Homeowners remortgaging this year could see their disposable income fall by more than a quarter as rising interest rates drive massive increases in mortgage costs.

A total of 1.3million households will come to the end of their fixed rate mortgage contracts this year and will need to remortgage at higher interest rates, according to UK Finance, the banking trade body.

The Bank of England’s five consecutive interest rate hikes since December, combined with soaring inflation, mean these households will see ‘massive’ drops in the money they have left after taxes and bills , experts have warned.

Of the 1.3 million, an estimated 429,000 are nearing the end of the two-year patches. These borrowers took out mortgages when interest rates were at a record high of 0.1pc during the pandemic, from 1.25pc today, and will see the biggest increases in their borrowing costs.

Someone earning £65,000 on a two-year fixed rate deal that expires this year will see their disposable income drop by 23% when they pay off, after taking into account the rising cost of living and higher mortgage rates high, according to UK Finance’s Telegraph analysis of Figures. This means the money they will have left after tax, basic household spending and credit commitments will fall from £27,086 to £20,839 each year, a drop of £6,247 or 23%.

If these borrowers do not repay, they will switch to their lender’s “standard variable rate”, which will likely be much higher.

Low-income people will see even larger proportional declines. Someone earning £35,000 on a two-year fixed rate contract that expires this year will see their disposable income drop by 27%. Instead of having £12,222 left, they will only have £8,894 – a loss of £3,329.

James Tatch of UK Finance said: “It’s huge. But then we had nothing like this in my life. There is no precedent in recent history, we are in uncharted territory.

During the 1990s, interest rates were rising at a similar rate, but at that time, rates were rising from a high level. However, big banks are now much better able to forbear on distressed borrowers, Mr Tatch said. This means that there are unlikely to be massive forced sales, although mortgage arrears are likely to rise, he said.

But even if lenders aren’t urging homeowners to sell, the affordability crisis could tempt many to move anyway. Lewis Shaw, of Shaw Financial Services, a mortgage broker, said: “Rate hikes of this magnitude will force many people to consider selling their current property. This could lower property prices, he added.

According to UK Finance, borrowers remortgaging after five years would see a smaller drop in disposable income of around 14%. These calculations do not take into account salary increases during the period.