Mortgages.scot

Increasing interest rates are never good news. Especially when you consider the increased cost of living with inflation running above 5% at the moment. I can't help specifically pointing out the hike in Gas & Electricity. My own fixed rate deal with Scottish Power comes to an end next month. I was paying £120 each month for both, which is increasing next month to £180, an increase of £720 this year.

So higher mortgage payments, the higher general cost of living, taxes going up to start recovering the cost of COVID means 2022 is not going to be the post-covid era many were expecting.

What about mortgage stress rates?

Few are talking about it but with an 0.5% increase in interest rates so far this year and more expected, it is going to hit homebuyers even harder again due to the stress rates.

When applying for a mortgage lenders are required to stress the payments. For example, if the lender's standard variable rate for the mortgage is 3.49% the FCA requires the lender to test a borrower would be able to afford the mortgage payments if the mortgage rate was 3% higher. In this example 6.49%. Now add on another 0.5% and borrowers need to demonstrate affordability at 6.99%.

In the market today there are still quite a few rates under 2% but let's use that as an example and a loan of £200,000 over 25 years.

At 2% the payments would be £848 per month.
At 6.99% the payments would be £1,412 per month.

An increase of £564 each month. Add to that lenders will factor in the higher living costs and borrowers could find themselves having to find more than £600 each month just to prove they could afford the mortgage if rates went much higher.

It's looking a bit grim for 2022, many analysts are predicting that interest rates will increase to 1.5% by the end of the year.