Home owners 'face mortgage shock'

Two million home owners could face a mortgage hike

Home owners whose mortgage interest is reviewed on an annual, rather than monthly, basis face a sharp jump in payments, a mortgage broker has warned.

Mortgage broker Charcol said that with four interest rate rises this year, borrowers could see their interest payments rise by about a quarter.

For a mortgage of £100,000, borrowers on annual interest review could find their payments rise by £83 a month.

One million people have their interest reviewed annually, Charcol estimated.

Interest recouped

Many borrowers, who took out their mortgages in the 1980s and 1990s, have their interest rate reviewed on an annual basis at the beginning of the calendar year.

For the whole of 2004 these borrowers have been paying a rate of interest set in January.

These borrowers could be in for a nasty shock, when their payments shoot up Ray Boulger, Charcol

Back then Bank of England interest rates stood at 3.75%, today they are 4.75%, an increase of one percentage point.

In addition, under annual interest review rules, lenders are allowed to recoup any shortfall in interest charged in one year in the next.

As a result, some borrowers will find that the interest rate on their mortgage will rise by more than one percentage point at the start of 2005.

"Interest rates over the course of the year are applied to the mortgage at the start of each new year," Ray Boulger, Charcol technical director, told BBC News.

"As payments will have been calculated on a lower interest rate at the start of 2004, borrowers on annual review will have a shortfall to make up next year."

"These borrowers could be in for a nasty shock, when their payments shoot up."

The Bank of England's Monetary Policy Committee left UK interest rates on hold at 4.75% on Thursday.