Sunday, May 19, 2024

Loss Of Discretionary Income For Homeowners With Fixed-Rate Mortgages That Are About To Expire


The burden on mortgage borrowers will increase due to high inflation and rising interest rates.

Homeowners switching from fixed-rate mortgages to new ones this year should usually anticipate a 7% decrease in their disposable income.

Rising mortgage interest rates and the rising cost of living together account for the anticipated decline in the income households will have available for discretionary spending and saving.

As cost pressures intensify, especially for households with lower incomes, UK Finance expects increasing pressure on mortgage defaults.

1.3 million clients are scheduled to have their fixed-rate agreements expire this year, and unless they refinance, they will switch to their lender’s usual variable rate (SVR).

As said by UK Finance’s “trends in the economy and lending” analysis paper, the combined effects of cost of living and re-mortgaging onto a new agreement would cause a 7% fall in their free disposable income on average.

Depending on when the prior mortgage was obtained. A little more than two-thirds of the fixed rates maturing in 2022 is secured by five- and two-year agreements.

UK Finance predicts that after switching to a new contract, 17% of borrowers, or about 9% of those whose fixed rates are set to expire this year, will have less than 10% of their income remaining as disposable income.

Even if these borrowers’ options for remortgaging on the open market might be more constrained, the widespread availability of internal product transfer offers means that practically everyone can get a new mortgage contract at competitive rates, according to the document.

20% of the remaining population would have 10 to 20% of their discretionary income available for “wiggle room”.

UK Finance stated that the increase in national insurance contributions and energy prices did not go into effect until April, when most of the current cost-of-living pressures were first felt.

The report stated: “However, overall CPI (Consumer Prices Index) inflation touched 9.1% in May, driven by the enduring supply chain problems that started with Covid-19, and the global economic consequences from the ongoing situation in Ukraine.”

In the upcoming months, inflation is predicted to reach double digits.

Real household disposable income decreased by 0.2% between January and March, according to data released earlier this week by the Office for National Statistics (ONS), as household inflation increased by 1.7% during that period, outpacing the 1.5% income rise.

Before now, the UK government announced a set of cost-of-living support measures.

The present generation of mortgage consumers has never lived in the UK, where inflation was a significant source of public anxiety or individual worry.

The UK Finance statement also discussed wage growth, noting that while it is “definitely more robust than in recent years,” it is not anticipated to keep up with price increases in the same manner as it did during prior periods of high inflation in the middle of the 1970s and the beginning of the 1980s.

“Two generations of current mortgage customers were not yet born at the time and have not had any experience of the UK in which inflation was a cause for broad national or personal concern,” the memo stated.

While avoiding a wage-price spiral that would affect the entire economy, it was noted that households would likely experience a considerable decrease in real incomes due to pay increases falling behind price growth.

Seventy-five per cent (75%) of all active homeowner mortgages are currently fixed-rate loans.

The 7% average family financial hit anticipated for those exiting arrangements this year is “quite severe,” the study stated. Still, a robust re-mortgage market and the abundance of competitively priced internal transfer packages for those unable to refinance on the open market ensure the industry will continue to offer decent deals.

According to UK Finance, the vast majority of customers will be able to refinance reasonably this year because of stricter mortgage lending regulations that have been in place since 2014 (and hence apply to many existing deals).

“As the cost-of-living squeeze continues, with additional pressures anticipated in the second half of the year, the overall burden is likely to put pressure on some households’ payments, both in the mortgage area and for their other credit commitments”, the paper’s conclusion read.

“Although our research indicates that most households can manage, we anticipate some upward pressure on mortgage arrears as these pressures tighten, likely to be concentrated among lower-income families.

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