Loan Rate Rise Will Push Many “Over The Precipice”
Once again, the Bank of England kept the base rate of interest for loans and savings at its historically low level of just 0.5 per cent this month and although this has now been the case for 27 consecutive months, there is growing speculation amongst experts and consumers, as to when the cost of a loan will eventually increase.
One loan servicing company has warned that any rate increase in the future is likely to lead to a significant increase in the level of loan arrears and therefore repossessions amongst home owners, regardless of when the rate increase actually happens.
Oakwood Global Finance has warned that a loan rate increase will push many people with a variable rate home owner loan “over the precipice”, due to them not being able to afford the new repayments on their loan.
The company says that the majority of its loan book was taken out between 200 and 2007, when the typical interest rate on a loan was between 5 and 6 per cent, with lenders calculating loan affordability on these rates, thereby giving borrowers a margin for any rate rises.
However, many recent loans have had their affordability calculated at a typical rate of around 3.5 per cent and any rate rise could have a dramatic impact on a new borrower’s affordability, as they have never been used to paying so much on their home owner loan.
Laurence Morey of Oakwood, also pointed out that many new borrowers who have taken out fixed rate loans in the past two or three years are unlikely to be able to switch their loan to a new provider once their initial deal ends, due to tighter lending criteria and lower loan to value ratios, leaving them trapped with their existing lender’s standard variable rate and having to pay whatever rate is charged by that lender.
