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Last Updated: Monday, 17 December 2007, 15:32 GMT
Fixed-rate mortgage borrowers hit
The Bank of England
The Bank of England put up rates 5 times in the year to July 2007
More than a fifth of people who came off fixed-rate mortgages this year have found it hard to meet higher repayments, the Bank of England says.

Its survey of 2,000 people found 22% of people whose fixed rate deals expired had reported financial difficulties.

Only 6% of those on variable rate mortgages had found it hard to cope with higher interest rates.

More than a million fixed rate deals expected to end in the coming year, but the Bank expects most people to cope.

Mortgage holders "appeared not to have experienced any increased difficulty [in managing their household finances] despite the increase in policy rates over the year," said the bank.

"Partly, this reflects the widespread use of fixed-rate mortgage products."

The figures were derived from a survey of 2,000 people and their household finances, the results of which were published in the Bank of England's Quarterly Bulletin.

Payment shock?

The Bank raised interest rates five times before this month's cut, which took the Bank's base rate down to 5.5%.

[Mortgage holders] have deep wells of housing equity to draw on should they experience temporary problems servicing their debts
Bank of England

There has been concern for some time among mortgage lenders about people on fixed rate mortgages suffering "payment shock", once their deals expire and they have to pay off their home loans at higher interest rates.

Just over half of all people with mortgages had a fixed rate deal in the year to September 2007, when the Bank's survey was carried out.

And 16% of all mortgages had been on a fixed rate which had expired in those 12 months.

Most of those, 79%, had seen their payments rise, by an average of 59 a month, which was equivalent to roughly 12% of their monthly mortgage payments.

And a quarter of those whose deals had come to an end found their repayments rising by more than 20%.

The 38% of people with fixed rate deals that had still to expire were expecting to pay an average of even more - 66 a month - but half of them thought it would in fact be more than two years before their deals came to an end.

Sinking or swimming?

However the bank's analysis strikes an optimistic note.

About 8% of all mortgage holders said they were having problems repaying, amounting to roughly one million people.

But that was half the percentage seen back in 1991 in the depths of the then housing recession.

The Bank said there were several possible explanations:

  • interest rates had, until the recent cut, risen less sharply than in the early 1990s
  • the economy was still strong, giving people the opportunity to earn more
  • and thanks to rising prices many people with mortgages have a large amount of equity in their homes.

"Relative to the early 1990s, mortgagors have deep wells of housing equity to draw on should they experience temporary problems servicing their debts," says the Bank.

"In recent years the proportion of mortgagors with small amounts of equity in their homes was substantially lower than it had been in the mid 1990s."

The bank calculated that this cushion amounted to more than 100,00 for 60% of all mortgagors.

When asked how they would cope with higher repayments, 39% of those whose deals had yet to end said they would cut back their other spending.

Meanwhile 9% said they would take a second job or work more overtime and 8% said they had already started to rein in their spending.

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