Homeowners told there’ll be tough times ahead

The recent cuts in interest rates came as good news for millions of homeowners struggling to make ends meet.

However, those hoping that a series of further cuts would help them back on to an even keel were dealt a blow when Mervyn King, governor of the Bank of England, said that inflation is set to rise over the coming months. This effectively rules out aggressive interest rate reductions this year.

The governor couldn’t have been more blunt – he warned families to expect a decline in their standard of living as rising food prices and energy bills are likely to continue and place further strain on monthly finances. Ouch.

Many households are already facing significant financial difficulties. The latest figures from the Council of Mortgage Lenders revealed that home repossessions soared by 21% to 27,000 last year – the highest level since 1999. The number of people falling behind on mortgage payments has also increased sharply with 129,800 borrowers now at least three months in arrears.

Their situation may improve slightly as lenders reduce their variable mortgage rates in response to this month’s 0.25 percentage point rate cut. However, those hoping for significantly lower borrowing rate costs going forward, look set to be disappointed.

Some economists had been talking of Bank rate – currently 5.25% – falling to 4.25% by the end of the year. This now seems highly unlikely. We may see one, and perhaps two, more quarter-point reductions depending on the extent of the economic slowdown, but anyone banking on cheap borrowing and a resurgent housing market to get them out of trouble needs to think again.

House prices remained flat in December according to Halifax, and they have only increased in value by an average of 4.5% over the last 12 months. The subdued market looks set to continue with King warning that prices could even fall slightly over the next few years. This could make it difficult for those struggling to meet their mortgage payments to sell their homes – so what should they do instead?

If you are in this position, look to see if there is any way to reduce your monthly mortgage payments. If you are paying your lender’s standard variable rate (SVR) and will not be charged a redemption penalty if you redeem the loan, you should be able to remortgage onto a lower rate. You should also look to remortgage if you are coming to the end of your current deal as you will probably move on to your lender’s SVR once your fixed or discounted period ends.

The typical SVR is around 7.25%, but Yorkshire building society has a two-year fix at 4.89%. This would bring the monthly payments of someone with a £150,000 interest only mortgage down from £906 to £611. There is a £995 arrangement fee with this deal.

If money is tight, fixing can be a good idea because it gives protection against interest rate rises and makes budgeting easier. If you would prefer longer term security, Newcastle building society has the best five-year fix at 5.20%. The arrangement fee is £795 although those remortgaging receive a free valuation and free legal work.

However, if you think interest rates will fall further and are prepared to take a bit of a gamble, Hanley Economic building society has a two-year discount with a rate of 5.10%. There is a £799 arrangement fee but free legal work and valuation for remortgages.

If you are looking for a penalty free deal, John Charcol’s lifetime tracker at 5.63% is the best option. The fee is £995 but if you are remortgaging you will receive a free valuation and free legal work.

Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.

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