What could a recession mean for mortgages? ‘Fixed-rate customers could struggle’

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The Bank of England has been raising its base interest rates nearly every month since February in a bid to curb the UK’s rapidly spiralling inflation rate. Although this is a partially effective measure to discourage spending and bring costs down, wholesale fuel and energy costs are expected to increase even more in the coming months, which can only mean higher interest rates.

The increase is designed to make borrowing more expensive and encourage people to save instead.

However, the impact of this has been described to be the biggest two-year disposable income hit for households since at least the 1960s.

On the increase, the Bank of England’s deputy governor Dave Ramsden said: “We know that what we’re doing is adding to an already very challenging environment.

“But our assessment is we needed to act forcefully to ensure that inflation doesn’t become embedded.”

A damning assessment from the National Institute of Economic and Social Research (NIESR) recently found average real disposable incomes will fall by an unprecedented 2.5 percent this year and remain seven percent below what they were headed to be pre-Covid level by 2026.

Stephen Millard, NIESR’s deputy director for macroeconomics said: “The UK economy is heading into a period of stagflation with high inflation and a recession hitting the economy simultaneously.”

A large proportion of borrowers are those with mortgages, so Express.co.uk spoke to experts to find out just how a recession might impact homeowners’ finances.

How can a recession impact mortgages?

Melanie Spencer, head of payment and mortgage services and business development director at finova said: “As the threat of a recession looms, there’s no doubt that homeowners will be uneasy about the future of their mortgage payments, even if they’re currently on solid financial ground.

“However, the impact of a recession, and what this means for a household’s mortgage, entirely depends on people’s individual financial circumstances and the deals that they’re on.”

Rising inflation and interest rates mean different things to those with a variable rate than those with a fixed-term mortgage.

Ms Spencer said: “Consumers that have opted for fixed-rate products could be insulated from rate rises for some time, however, they may still find themselves struggling with late payments and foreclosure due to other financial hardships.”

However, according to trade body UK Finance, 1.3 million fixed rates are set to expire this year.

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Ms Spencer said: “These customers may be forced to bite the bullet and remortgage sooner rather than later.”

But those with variable rate mortgages will be “seeing their payments increase immediately”, with even the smallest change to interest rates “triggering another rise in their biggest monthly outgoing.”

There’s understandably more concern for those on variable rate mortgages, who will see a rise in line with interest rates.

Sarah Thompson, Managing Director, LRG: “[Variable mortgage rates] will have been stress tested by brokers who would lend based on how an interest rate rise will affect someone’s ability to repay.

“Homeowners shouldn’t worry about an interest rate that is out of their control.

“It will rise, but it isn’t and won’t come close to the historic rises of decades ago. A reassessment of outgoings, particularly with the cost of everything else rising will be a good safety measure in the face of such insecurity.”

Is there a way to mitigate hard impact?

As damning as it might currently sound, there are measures you can take to stay afloat.

Ms Spencer said: “Lenders do have provisions in place to help borrowers cope with economic struggles including job losses or reduced income. For example, during the pandemic, lenders offered all customers the option of a payment holiday, regardless of their financial situation.

“Lenders are no longer required to stress-test borrowers’ finances, however, lenders still hold the risk and so I suspect many will still be stress testing their borrowers.

“Ultimately, this will help protect the end customer, as lenders can ensure that their deal doesn’t strain their affordability further down the line.”

If people are worried about defaulting on a loan, the sooner they reach out to their mortgage adviser or lender the better.

Ms Spencer said: “If there’s some time left before a payment’s due, they’ll have more options to choose from, such as modifying their loan and other means to help mitigate the risk.

“People looking to take pre-emptive action will also want to consider Mortgage Payment Protection Insurance, that can cover their payments in case of accident, sickness and/or unemployment.”

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