How one million homeowners have only known ultra low rates

Tim Wallace
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MORE than one million first time buyers have jumped on the property ladder in the five years since the Bank of England cut interest rates to 0.5 per cent, raising fears that borrowers are unprepared for a rate rise in the years to come.

It is five years to the day since the base rate hit rock bottom, but as the economic recovery takes hold a rate hike is now expected in early 2015.

The 1.06m who have taken out their first mortgage since 2009 make up just over six per cent of all homeowners.

Those with no experience of higher rates are increasingly keen to borrow – figures from the Council of Mortgage Lenders shows 46 per cent of borrowers in December 2013 were first time buyers, compared with 40 per cent five years ago.

And thanks to low rates, even as house prices have risen the average monthly repayment has fallen from 20.5 per cent of the borrower’s income to 19.2 per cent.

The Bank of England intends to raise rates only slowly, and even when the recovery is fully established expects the base rate to stabilise at around three per cent – well below the five per cent norm seen before the crash.

But the costs will be significantly higher than they are now.

A typical borrower with a £150,000 loan at a rate of three per cent now would see their monthly repayments of £717 jump £170 to £887 if their rate increased to five per cent.

Regulators have acted to make it tougher to get a mortgage – new rules next month mean banks have to check borrowers can afford a loan at higher interest rates in several years’ time – but that will not apply to those who have borrowed since rates hit rock bottom.