For more than a decade, the Bank of England’s Monetary Policy Committee’s bank base rate decisions were very often a foregone conclusion. Barring the odd tweak here or there, they were pretty much on hold for most of the 2010s.
It meant that a generation of borrowers – and even some brokers – had never lived through an era where interest rates were ever above 1% or changed regularly.
So, when the BoE started increasing rates in December 2021, it was unchartered territory for a lot of younger borrowers. To be fair, even seasoned observers were surprised by the pace of the BoE’s rate hikes during that 18-month tightening cycle.
Yet, despite the shock, borrowers have shown remarkable resilience. While arrears have edged up slightly, they remain around 1% – a far cry from past crises, thanks in part to increase lender and government interventions.
However, we must not become complacent. Although mortgage rates are lower than they were a year ago, we must not confuse “less tough” with “easy”. Many borrowers are still struggling to meet their elevated monthly repayments.
To better understand the lay of the land, Stonebridge recently launched its new Mortgage Affordability Index.
By analysing official wage and mortgage statistics alongside our own loan data, we’ve been able to calculate the relative affordability of mortgage finance in relation to wages all the way back to the start of 2016.
The unique index revealed that borrowers taking out new mortgages in September spent 40.1% of their gross salary on repayments. While this is a slight improvement on August’s 40.6%, it marked the third successive month where repayments exceeded 40% of income.
For context, in November 2021 – just before the Bank of England began raising rates – mortgage payments accounted for 32.1% of the average borrower’s salary. The long-term average is 35.9%, highlighting the financial strain many still face.
Let’s also not forget that a lot of people are yet to see their mortgage repayments rise. In the past three years, 3.8 million borrowers have moved onto a higher mortgage rate. However, a further 4.4 million borrowers – about half of all mortgage holders – will do so between now and the end of 2027, according to the BoE.
Of these, 2.7 million borrowers will refinance onto a rate above 3% for the first time, with repayments rising by £146 a month on average. Alarmingly, 420,000 – 5% of borrowers – will see their monthly repayments rise by more than £500 a month.
If these projections hold – and there’s no reason to doubt them – we are only halfway through the so-called “payment shock” of the past few years.
However, this presents a significant opportunity for brokers. Borrowers depended on professional advice when rates were rising, and they will need just as much support as rates fall during 2025.
If you’re not already reaching out to your existing clients due to refinance in 2025, don’t hesitate another moment, as we all know that lenders will be ready. While a product transfer may suit some, many could secure a better deal by shopping around and a better service from you, even if the PT is best.
With a significant refinance opportunity and so many borrowers likely facing higher rates simultaneously, there has never been a better opportunity to highlight the value of quality independent mortgage advice. Don’t miss it!
