Two ladies were chatting on the table next to me in Costa. The summary of their conversation was one had managed to secure a mortgage on a flat. She was excited (as you would be) but as the conversation unfurled it was revealed she and her partner were “only just” able to afford to repayments thanks to low interest rates and she’d locked them in for a couple of years. Low interest rates meant they’d also been able to borrow some of the money they needed for a deposit.
My head was buried in my hands.
I’ve heard so much about low interest rates making homes affordable. It’s true that rates are at the lowest levels ever recorded, which in turn means less is being repaid in interest and more can be borrowed. But let’s not forget the centre piece of this: interest rates are at their lowest levels ever.
At some point these rates are going to rise. When that happens people who are “just getting by” paying their mortgage are in for a shock. A quarter per cent rise adds about 15 pounds a month to a one hundred thousand pound mortgage. That doesn’t seem like much, but let’s take a reality check on where we are at the moment.
When I took out my first mortgage interest rates were 9 per cent.
That’s a monthly repayment over 500 pounds greater than what I would pay today.
9 per cent might seem like a lot, but this isn’t necessarily the case. During the 1990s rates hit 15 per cent, rising sharply during a currency crisis known as Black Wednesday. House prices crashed, which meant people owed more than their house was worth. Unable to sell their houses or afford the mortgage on them arrears mounted and soon repossessions did too.
I’m not suggesting we’re suddenly going to see a crippling rise. What I am suggesting is people are so focused on the low rates we’re experiencing right now they’re making decisions that will harm society in the longer run. Being able to “just” afford a mortgage today makes it more likely they won’t be able to afford the same mortgage 2 or 3 years from now when their deal runs out and mortgage repayments start to increase.
If you are able to “just” afford a mortgage I’d encourage you to think very carefully about what you do. Right now you may be able to meet your repayments and that might even be the case for the next 2, 3 or 5 years while your interest rate cap is in place. But when then? Could you afford a doubling of your current repayment?
Could you afford to lose your home?