At the start of global credit crunch, the Bank of England initiated a new process of quantitive easing, which at the time of writing has reached a figure of £375bn being pumped into the UK economy. Aligned with this policy has been a gradual and sustained suppression of interest rates, as the government has tried to increase consumer spending as a means to generate growth.
Whilst the relative merits, and successes, of the Quantitive Easing program are still being analysed (the true effect of these programs are unlikely to be known for a number of years), what we have experienced is a blanket decreasing of our mortgage costs in the UK, the likes of which we have not experienced for many years. Whilst this has undoubtedly held substantial benefits for many UK mortgage holders in the short term, there are growing concerns over a potential mortgage and interest rate timebomb which looks set to have a substantial impact on the UK property market in the years to come.
At the heart of the problem lies the large amount of people who are currently on what's known as interest only mortgages, which allow property owners the option to pay back only the interest portion of the mortgage. They are then free to select a separate repayment vehicle with which to repay the capital portion of the mortgage. Becoming popular initially in the Seventies, interest only mortgages grew in popularity as people were attracted to the lower repayment on offer through these types of mortgages.
Indeed whilst the problems with the endowment mis-selling did slow the trend towards interest only mortgage for a period of time, the past 15 years have seen many first and second time buyers using them as a means to gaining a foothold on the first steps of the UK property ladder. Unfortunately, many of these purchasers had only witnessed considerable house price appreciation, and as such the requirement to cater for the capital aspect of the loan was seen as secondary.
So why is this becoming such an issue now?
The key concern for the UK property market is that there is today an estimated 1.3m property owners whose interest only mortgages will mature over the next 8 years, a large percentage of whom have no means of paying off the capital aspect of the loan. This issue has been compounded considerably by the rapidly increasing cost of living we have experienced in recent years, with key purchasers such as food and petrol now more expensive than ever before the ability to pay extra towards mortgages has been severely diminished.
According to the latest Financial Services Authority (FSA) data, there is now an estimated 320,000 interest only borrowers who have missed or are late with at least one mortgage repayment. The obvious fear being that if homeowners are struggling to pay interest on their mortgage at present, how will they be able to fulfil on the capital element of the loan?
Whilst the issues are evident, the greater concern lies ahead, particularly with interest rates expected to increase in the near future. At present, the majority of UK mortgage holders have been protected by the damping down of interest rates by the Bank Of England. However, they are only able to control the interest rates in the short to mid term, and the projection for the long term is a protracted increase of interest rates to a level more in keeping with historical averages.
Already we are seeing some of the major UK banks and building societies beginning to increase rates on their mortgage products, and whilst the rates are still relatively low, the impact of these increases is soon to be felt across the market. Only time will tell what the long term resolution will be for the UK property market, however those failing to address the issue today are likely to see a more considerable impact in the years to come.
James Potter writes for Distressed Homes, one of the leading providers of distressed property for sale in the UK.
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