Disposable income affected for homeowners whose fixed rate mortgage contracts are about to expire

Homeowners who leave fixed-rate mortgages this year and switch to a new deal can typically expect to see their disposable income drop by 7%, according to analysis by a trade association.

The projected decline in the amount of income that households will have left to spend and save as they please is due to both rising mortgage interest rates and the soaring cost of living.

UK Finance said it expects some upward pressure on mortgage arrears as cost pressures tighten, particularly among lower-income households.

According to UK Finance, 1.3 million customers are expected to reach the end of their fixed rate agreements this year and unless they repay they will switch to their lender’s standard variable rate (SVR).

A ‘Economy and Lending Trends’ analysis paper published by UK Finance said: ‘On average, we estimate that the combined impact of cost of living and re-mortgage on a new deal would result in a reduction of approximately 7% of their free disposable income.

The impacts vary widely depending on when the previous mortgage was taken out, UK Finance said.

Five- and two-year fixed-rate transactions account for about two-thirds of those fixed rates maturing in 2022.

Around 9% of those whose fixed rates are due to end this year, or around 117,000 borrowers, will have less than 10% of their disposable income as disposable income after switching to a new deal, UK Finance estimates.

Its document stated: “While these borrowers’ open-market remortgage options may be more limited, the widespread availability of in-house product transfer agreements means that almost anyone will be able to access a new mortgage agreement at competitive rates.”

Another 20% would have between 10 and 20% of their disposable income as “wiggle room”.

UK Finance added that the bulk of the current pressure on the cost of living was only seen in April, when higher National Insurance contributions and higher energy prices took effect.

The analysis paper said: “Meanwhile, headline CPI (consumer price index) inflation rose to 9.1% in May, driven by ongoing supply chain issues which started with Covid-19 and the global economic fallout from the current crisis in Ukraine.”

Inflation is expected to reach double digits in the coming months.

Earlier this week, the Office for National Statistics (ONS) said real household disposable income fell by 0.2% between January and March as income growth of 1.5% was overtaken by the household inflation of 1.7%.

The UK government previously announced a package of cost-of-living support measures.

Two generations of current mortgage customers…have had no experience of a UK in which inflation was a cause for widespread national or personal concern

British financial document

The UK Finance paper also highlighted wage growth, saying that while it is “certainly more robust than in recent years”, it is unlikely to follow price growth as it has in previous periods of strong growth. mid-year inflation. 1970s and early 1980s.

The document stated: ‘Two generations of current mortgage customers were unborn at the time and had no experience of a UK in which inflation was a cause of widespread national or personal concern.’

He said of wage growth lagging behind price growth: “While this avoids an economy-wide wage-price spiral, it also means that households should experience a significant contraction in income. real.”

Three-quarters (75%) of all outstanding homeowner mortgages are currently fixed rate.

The document says that while the typical 7% hit to household finances predicted for those exiting deals this year is “relatively large”, a thriving mortgage market, as well as the widespread availability of internally priced transfer deals competitive for those who cannot refinance on the open market, means the industry will continue to offer good value deals.

Tougher mortgage rules in place since 2014 (and therefore applicable to many existing deals) will also help ensure the vast majority of customers are able to refinance affordably this year, UK Finance said.

The document concluded: “As the cost of living compression continues, with further pressures expected in the second half of the year, the overall burden is likely to put pressure on payments for some households, both in the space mortgage and for their other credit commitments.

“While our analysis suggests most will be able to cope, we expect some upward pressure on mortgage arrears as these pressures tighten, and this should be concentrated among lower-income households.

“As always, we encourage any customers concerned about their ability to maintain their payments to contact their lender as soon as possible.

“The industry stands ready to help with a range of forbearance tools that can be tailored to better suit individual customer circumstances.”

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