The rising cost of living coupled with higher interest rates could create a wave of new mortgage prisoners who don’t qualify for a new deal and are left paying costly variable rates, advisers fear.
A decision in principle (DIP) pulled together for a client a couple of months ago has been run again more recently with the offer reduced by around £20,000, in one case seen by Mark Dyason, founder of Edinburgh Mortgage Advice.
The numbers and circumstances of the client are all the same, but in the meantime the cost of living so, inflation has hit nine per cent, and the Bank of England has nudged up the base rate.
Dyason said: “What happens to a 95 per cent LTV mortgage in two years’ time when they can’t afford the mortgage?”
Duty of care from brokers towards clients at the top of their borrowing limits is particularly pertinent in the current environment, he added.
“We help clients get a mortgage, but then make sure they can get rid of it [pay it off].
“For those stretching as far as they can go, there is a duty of care around long-term affordability and mobility. We need to make sure they don’t end up wanting to move and actually they can’t.”
Simon Cutler, director at Blackdown IFA, is worried that people may be left paying variable rates when they come off their fixed rates in the year or so if they can’t pass lenders’ affordability assessments.
He fears rising inflation and mortgage rates have created a “perfect storm”.
“Lenders’ affordability criteria assessments are going to be much more difficult for borrowers to meet when they come out of their current deals.
“Those coming out of fixed rates, could see mortgages costing them thousands of pounds more.”
Cutler said he is also talking to clients about how they can protect themselves, and where it may not be a good idea to overextend.
He added: “It’s a real risk, mortgage prisoners.
“I try not to remember the bad times, but I’ve worked through two or three really tough times.
“The combination of factors doesn’t look great.”
Dean Esnard, director at Magni Finance said the option for product transfers should help make sure most borrowers don’t end up on high variable rates.
He said: “When you do a rate switch you don’t go through an affordability check – providing you have maintained your mortgage payments.
“You are forced to stay with whatever your lender offers you, but normally the rates an existing lender will offer you are better or in line with the existing market.
“From what we’ve seen there is nothing to panic over yet. Rates have increased a lot but I think they will slow down.”
Nationwide recently increased its Loan to Income (LTI) multiple to 6.5 for customers remortgaging on a like for like basis.
The lender said the move may go some way towards helping mortgage prisoners created by the higher cost of living and rates.
Brokers are hoping that the market will follow Nationwide’s lead and adapt to the changing climate.
Greg Cunnington, chief operating officer at LDN Finance, said: “Clients have been stress tested at much higher rates, typically the lender’s Standard Variable Rate + three per cent, when taking out their original mortgage as part of MMR. As such, even though mortgage rates have increased the payments should be comfortably affordable as will still be much lower than these stress tested rates.
“However, mortgage rates have increased quite dramatically compared to two years ago, when a lot of people will have taken their current fixed rates.
“With increased costs for utilities and other living expenses, clients should be prepared for these increases to their mortgage rates and monthly mortgage payments as it is very likely that clients looking to remortgage at the end of their current fixed rate will be moving to a higher rate.”