Why millions are facing mortgage payment pain - Sarah Coles

We wanted to explore how people will cope if their fixed rate mortgage comes to an end this year, so we put together a Savings & Resilience Barometer study with Oxford Economics. People tend to struggle most after their mortgage costs exceed 25% of their household income after tax, when their risk of falling into arrears ramps up significantly, and we found that there will be 2 million people in this position by the end of the year.

We then looked at the wider finances of this group – and whether they have the resources to manage with much higher mortgage payments. This revealed some bigger issues. Among these 2 million, 650,000 are at ‘high risk’, because they are not only facing a dangerous hike in their mortgage payments, but they also have less than the minimum recommended emergency savings (3 months’ worth of essential expenses) to help them cover their additional costs.

Even worse, another 347,000 are at ‘critical risk’, because on top of the mortgage hit and not having enough savings to protect themselves, they are spending more cash each month than they have coming in. Life is hard enough before their mortgage payments shoot up, so they are likely to struggle enormously with this extra pressure.

Some groups of mortgage holders face even higher risks. Hard-pressed singletons will be facing these horrendous hikes alone, so it’s little surprise that they’re three times more likely to be at high risk and more than five times as likely to be critical risk than couples. There will also be newly single people, who have bought relatively recently after a separation or divorce, who have stretched their finances to breaking point in order to buy, and who face real threats from rising rates.

Younger owners have also been forced to stretch themselves to get onto the property ladder. They tend to be in cheaper properties, but have bigger mortgages and higher monthly payments. Despite making up 46% of the market, Millennials and Gen Z will make up 61% of the increase in those at risk of arrears.

However, those baby boomers who still have a mortgage also face huge challenges. This is a relatively small group, and is likely to include those rebuilding after divorce, or who hit financial problems along the way that left them with a mortgage later in life. They may also have scaled back their work commitments and be managing on a lower income. As a result, they’re one and a half times as likely to be at high risk and twice as likely to be at critical risk.

What can you do?

For those whose fixed rate deal is coming to an end this year, this raises the question of the right thing to do. Some will want to wait and see whether rates fall any further. The Barometer forecasts that mortgage rates should fall during 2023, and drop faster next year. It means some people may want to switch into a variable rate deal, and either hold it until it expires, or move into a fixed rate when they have fallen further. Whether an early switch is worth it will depend on the size of the mortgage, the relative rates, any fees you paid for the mortgage up front, and any early repayment charges.

However, while the Barometer shows the direction of travel over the year, there will also be bumps along the way, which wait-and-see borrowers need to be well aware of before they opt for a variable rate. There will be plenty of people who moved to a variable rate over the past few months, based on forecasts that rates would peak at 4.5% and then start falling back. They will have been expecting a 0.25 percentage point rise in March, another one in the spring, and then falls later in the year – which is roughly what the market was predicting.

However, expectations have changed a little in the past week. The market has started pricing in a slightly higher 0.5 percentage point rate rise in March, so some of the most competitive fixed rate deals have been pulled. It appears that strong labour market figures and robust retail sales are raising fears that inflation will hang around for longer. If we get another rise later in the spring, that will mean variable rates go higher than some people were expecting.

Then of course is the question of how long it will be before rates start falling back, and how low they will go. Unfortunately, there can never be any guarantees over either of these things.

Given this uncertainty, coupled with the fact that rates have already dropped quite some way from the peak in the aftermath of the mini budget, some borrowers may well decide that the value of certainty over their outgoings makes fixing for as little as 4% a relatively attractive prospect. In which case, it’s worth locking in a deal while they remain on the market.

These ups and downs mean that whatever approach you take to deal with the remortgaging lottery of 2023, you need some wiggle room, so you can cope financially if things don’t go entirely as you expect. For an awful lot of people this means going back to the drawing board with their household budget, and working hard to squeeze every extra penny out of their spending, in order to keep them on track while mortgage payments are higher.

Home prices fall – and it’s not looking good

This week we discovered that annual house price growth finally turned negative in February, and prices are down 1.1% in a year - after six consecutive months of falls.

Runaway mortgage rises at the end of last year proved the turning point for the market. After withstanding months of increasingly painful inflation, buyers were at full stretch – and the mortgage market mayhem in the aftermath of the mini-budget was the final straw. We knew from that point that a house price correction of some kind was likely to be on the cards.

The question is whether this is the start of a gradual and modest deflation, or whether this is a bubble that’s set to burst. There’s no doubt we’ll see more falls in the coming months, but overall predictions of drops come in anywhere between 5% and 12%. Since the start of 2023, there has been some hope that falling mortgage rates would bring more buyers back, so falls would remain in single digits. This remains a real possibility, but there are signs of trouble.

Figures earlier in the week from Zoopla revealed that sellers are already cutting asking prices by an average of £14,100 – or 4.5% – in order to persuade a buyer to bite. It’s the biggest discount in five years, and means giving up a third of their pandemic price rise. These figures may be yet to feed into the mortgage approval data from Nationwide, which could mean there’s more bad news on the way.

SARAH COLESHead of Personal Finance and Podcast Host for Switch Your Money On