Scots households face £1000-a-year mortgage rise bombshell in just nine months after new interest rate hike

Worst hit will be the estimated 115,000 Scottish households on standard variable rate (SVR) mortgages or the 85,000 on tracker loans, which fluctuate with the Bank of England rate.

More than 100,000 fixed-rate mortgage deals which it is estimated are scheduled to end during 2022 in Scotland will also be hit. There are also concerns about affordability for first-time buyers trying to get on the housing ladder.

The shift from 1.75% to 2.25% takes borrowing costs to their highest level since 2008, during the global financial crisis that led to the big banks bailout.

Inflation - the pace at which prices rise - is currently at its highest rate for nearly four decades leaving many people facing hardship. Prices in August were 9.9% higher than they were 12 months ago.

According to analysis supported by analysts Moneyfacts, the typical Scots householder with a standard variable rate (SVR) mortgage with £100,000 in debt remaining will have seen their repayments soar by over £1000 a year since the base rate rises began in December, last year.

At that point SVR interest rates were typically 4.4%. 

Rocio Concha, director of policy and advocacy with the consumer organisation Which said: "This rate rise means millions of homeowners in the UK are facing significant hikes in their monthly outgoings at a time when rising food, energy and fuel costs are already stretching household budgets.

"This will be a particularly tough time for mortgage prisoners, some trapped on punitive rates for years and for whom help from government and regulators is long overdue."

The Federation of Small Businesses warned that commercial loans which are pegged to the base rate will rise "eating away at margins which are already under enormous pressure from inflation, sky-high energy bills and slumping consumer and small business confidence".

And the National Association of Property Buyers said it was a "really a worrying time" for those on variable rate mortgages, borrowers with an expiring fixed rate and new buyers.

The cost of living is increasing at nearly its fastest rate in 40 years, driven largely by the rising cost of food and fossil fuels.

Increasing interest rates puts consumers and businesses off spending or borrowing, providing a greater incentive to save. As demand for goods and services fall, in theory, that should have an prevent costs from rising.

The Bank of England has lowered its forecast for inflation, due to the energy price freeze.

They now predict that CPI inflation is likely to peak in October at just under 11% – lower than the peak of 13% forecast last month, before Liz Truss's two-year cap on bills was announced.

The minutes of the meeting warn, though, that we could suffer double-digit inflation for months.

The Bank of England also forecast that the UK economy is already in recession.

It said that it expected gross domestic product (GDP) - which is a measure of all the goods and services produced by the UK - to have shrunk by 0.1% between July and September.

A recession is defined as two consecutive quarters – or two three-month periods – of shrinking GDP.

UK output shrank by 0.1% in the second quarter of the year.

The Bank of England had previously predicted that GDP would grow between July and September before beginning to slow down in the final three months of the year.

According to analysts Moneyfacts, before the latest interest rate rises, the number of available mortgage products has plummeted by 517 over a month to leave just 3,890 on offer for September, the lowest number they have seen in over a year.

It is 1,425 fewer than were available at the start of December 2021 (5,315) before the first of the series of Bank of England base rate increases.

Before the base rate rise, the average two-year fixed rate was at 4.24%, the highest since January 2013 (4.24%), and 1.90% above where it sat in December 2021 (2.34%).

The equivalent average five-year fixed rate of 4.33% was the highest since November 2012 (4.47%), an increase of 1.69% above the equivalent rate from December 2021 (2.64%).

Rachel Springall, finance expert at Moneyfacts.co.uk, said: "This could not come at a worse time amid a cost of living crisis when household budgets are stretched. However, failing to fix and falling onto a standard variable rate (SVR) is unwise, as the average rate has risen to its highest level in over a decade.

"Fixing for the longer-term may then be desirable, but it is unknown if interest rates will settle, and borrowers find themselves locked into a higher rate compared to new deals surfacing. Choosing the right deal is crucial and seeking advice to navigate the mortgage maze is wise."

The Prime Minister has announced the freezing of average domestic energy bills at £2,500 a year until 2024, superseding Ofgem’s price cap that was supposed to rise to £3,549 on October 1 and then again in January. But it still means bills have doubled since last winter.

Kevin Brown, savings specialist at Glasgow-based mutual life and investments organisation Scottish Friendly, said that people need to fix their interest payments as quickly as possible to avoid higher payments biting.

“Better yet, paying down as much debt as possible, wherever possible could be a good habit to get into. Beyond paying off debts, trying to put money away for a rainy day is a good way to build a buffer, especially with so many unexpected bills likely in the current climate," he said.

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Analysis 

Aoife Deery, Citizens Advice Scotland's housing spokesman. 

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Struggling with your mortgage payments?

Don’t worry. There are things you can do.  

First of all, you don’t need to face the situation alone. You can get advice from your local CAB, who can help you try to maximise your income and check if you’re entitled to any benefits or tax credits that you’re currently missing out on (you’d be amazed how often this is the case!).

They can also help with looking at your household budget, check where you can make savings, which might include getting a better deal on mortgage and home insurance.

If you’ve done all that and still can’t make your payments, then it’s time to contact your mortgage lender and ask for their help. All lenders are legally required to treat you fairly and consider any request you make to change the way you pay your mortgage. 

For example, depending on your circumstances, your lender might offer you a break from paying your mortgage, or agree to reduce the amount you pay for a short period. Or you could arrange to have what you owe added to the capital outstanding on the mortgage, or perhaps extend the mortgage term. You might be able to negotiate a lower interest rate if you have equity in your property, or even switch to a cheaper mortgage altogether.

So, once you’ve had advice about your options and worked out your budget, you should write an offer letter to your lender. The should include: why you’re struggling to make your payments, what you can afford to pay each month, how your offer can cover the arrears as well as the ongoing mortgage payments, a built-in review period and a copy of your household budget.

If you took out your mortgage from 31 October 2004 onwards, your lender has to follow the Financial Conduct Authority (FCA) rules when dealing with mortgage arrears. These say that they must treat you fairly and consider any reasonable request from you to change when or how you pay your mortgage. If your mortgage was taken out before October 2004 a lender has to abide by the code that existed then.

If you have a different type of mortgage, such as an endowment mortgage, you may have other options, such as giving up your endowment policy or selling it off to an investor. This will provide you with a lump sum of money which you can use to help pay off the debt. 

But in all of this, the most important thing is to get good advice. Your local CAB will always offer free, confidential and independent advice on this - as on anything else.