A bank of England study released in mid December 2015 revealed the rather unsurprising news that Britons are carrying more mortgage debt than the previous year, with the average debt being £85,000 compared with £83,000 in 2014. The increase has largely been the result of escalating house prices and a healthy demand from first-time buyers. On the upside, the BOE study also found that rising wages and relatively low inflation means UK residents should be better able to cope with the expected hike in interest rates. Not everyone is so optimistic, however, especially for the long haul.
In fact, notwithstanding the soupçon of cheer regarding Brits’ abilities to cope with rate hikes, the BOE report acknowledged that higher debt levels have weighed heavily on mortgage payers, many of whom are impacted even more by the government’s austerity measures. Those measures have created a drop in income in about one third of British households. Accordingly, even though policymakers might take comfort in the notion that the interest rate hike in 2016 will have only a limited impact on the ability of many households to meet their debt payments, not every household will have an easy time of it. There are thousands of low-income families – as well as first-time buyers with high loan-to-income mortgages – who will face a struggle when interest rates begin to rise. A rate rise to 2%, for instance, would increase the share of mortgage holders paying more than 30% of income on repayments to 14 percent (the current rate is 9 percent).
House prices across the UK actually fell by 0.2 percent in November 2015, according to the Financial Times, but that slip did not significantly ease the affordability crisis for many buyers. And leading estate agents predict that UK house prices will rise by 50 percent over the next decade. According to the National Association of Estate Agents (NAEA), the average price across the country will rise from £280,000 to £419,000 by the year 2025. As always, the situation is even more extreme in London, where house prices are expected to double to £931,000 within that same time frame.
The average cost of renting a home is also expected to rise by 27 percent. Renters have their own set of challenges, with more than a quarter of them reporting that their rent remains a “heavy burden”. Matt Whittaker, the chief economist at the Resolution Foundation, has said that even though living standards have enjoyed what he calls a “long overdue rebound in 2015”, there are still concerns about the financial well being of many households, “notably renters and the not insignificant group of mortagors who continue to struggle to meet their monthly payments, despite years of rock bottom rates.”
For all too many Britons it is becoming progressively more difficult to maintain a reasonable standard of living, much less an affluent one.
A way out? For some, maybe.
The Resolution Foundation’s Mr. Whittaker summarised the problem quite neatly: notwithstanding the overall rise in wages and the current low inflation rates cited by the BOE report, and despite those “rock bottom rates” everyone has been buzzing about, many people continue to struggle month by month. It’s not surprising that many are looking for a way to ease the struggle.
Mortgage refinancing is one popular route taken by British homeowners. In particular, pensioners searching for ways to economise may be tempted to take advantage of the lower monthly payments, and on paper the prospect may look good. And indeed for some homeowners a refinance may very well be a good choice. But it is important to realise that refinancing is not the solution for everyone and in many cases what seems like a good deal in the short term could be very costly in the long term. Hence it is essential for anyone who is contemplating refinancing his or her mortgage to carefully weigh the options. A thorough understanding of the different types of mortgages available is necessary in order to avoid digging oneself even deeper into the debt hole.
It’s frustrating to be caught in an endless cycle of debt and even more frustrating to know that the problem of affordability is likely to get worse in years to come as house prices continue to soar, and interest rates creep upward. But there is almost always a way to make things easier, and fortunately there are good resources to help you choose the best way for you.