Homeowners are facing debt interest ‘time bomb’
A GENERATION of homeowners who have only known low interest mortgage rates have been warned that they are part of a potential debt ‘time bomb’.
Citizens Advice head Malcolm Ferey said that if the Bank of England base rate is increased and inflation continues to rise, monthly payments for some Islanders with tracker mortgages could rise beyond what they have budgeted for while those with fixed mortgages could find themselves paying much more when their current deals end.
Several financial experts have already predicted that interest rates could rise more than once in 2018, as the UK reacts to a surprising upturn in the economy, and the Bank of England hinted this week that interest rates could rise by ‘a greater extent’ than they thought in November. In Jersey, inflation is at 3.6 – its highest level in six years.
And while personal debt in Jersey is currently at a record low, with cases dealt with by Citizens Advice dropping last year from 248 to 119, Mr Ferey warned that rising interest rates could affect a whole generation of homeowners – something that has been dubbed a debt ‘time bomb’.
‘No one has a crystal ball but interest rates have been flat for much longer than anyone expected,’ he said.
‘Things have changed. Years ago there used to be ten-year fixed mortgages available but not at the moment. That suggests that providers expects interest rates to rise.’
The base rate fell from 5.5 in April 2008 to 0.5 in March 2009, where it remained static until dropping to 0.25 in August 2016. However, last year it rose for the first time since 2007 when the Bank of England increased the rate to 0.5.
Mr Ferey said that people struggling with increased mortgage payments was a factor behind the last financial crisis in 2008 and he advised people to ensure that they could cope with any changes.
‘The last recession was fuelled by people over-borrowing and taking up attractive deals, which were loaded with higher interest rates in later years,’ he said.
‘Anyone with a tracker rate should check the penalty clauses for fixing their mortgage, in case rates rise, because if interest rates do start climbing then people whose trackers come to an end can find themselves locked in to a new rate that they had not budgeted for.
‘If we learned anything from the last recession, it was that you can’t just live for today.
‘It means that some people might have to make tough decisions when rates change, such as looking at school fees or monthly payments on cars. It’s all about budgeting well now, exploring penalty clauses in your existing tracker and balancing that against suddenly having a long period of paying higher rates.’
However, while increased interest rates would be bad news for those with mortgages, it will be good news for savers.
‘There are always winners and losers,’ Mr Ferey said.
‘There must be lots of savers out there who have been waiting for rates to rise. It will be a bit of a culture shock at first, especially for homeowners who have only ever know low interest rates.’
Peter Seymour, manager of The Mortgage Shop, said that the message he would send to homeowners would be ‘don’t panic’.
‘Economists have got it spectacularly wrong in the past so we have to take everything with a large pinch of salt,’ he said.
‘The Bank of England have said that if there were any rises in rates they would not be greater than a quarter of a per cent. For someone with a £500,000 mortgage, that is only an extra £65 a month.’
Mr Seymour also said that stricter lending policies and the introduction in 2014 of the Mortgage Market Review meant that possible increase in interest rates had already been factored in to mortgages taken out in recent years.
‘It means that banks “means test” all borrowing, taking into account affordability if interest rates increase,’ he said.
‘However, people should be factoring in a possible modest increase in the cost of their borrowing. Many people we see are already looking at interest rates which are locked in for five years.’
Meanwhile, research carried out by the Registry Trust charity revealed that last year the number of debt cases in the Island’s courts fell 12 per cent to 1,724 – the lowest number on record.
The drop in personal debt cases last year was attributed to further prospects in the temporary/short term jobs market and tighter credit controls.
Mr Ferey said that it reflected a ‘downward trend’ in personal debt issues over the last few years.
‘The peak year was 2012 when we had 278 cases and more than £5 million of debt,’ he said.
‘It’s no longer easy to get credit these days, which has stopped people getting into problems who were before.
‘But also people seem to be more able to get more overtime and additional jobs to help tackle their debts.’