Higher mortgage payments for borrowers on annual review

Charcol has stated that with four interest rate rises this year, borrowers could see their interest payments rise by around 20 - 25%.

For a typical mortgage of £100,000, those on annual review could find their monthly interest payments rise by £83, equating to £1,000 over a year,* or even more if they are unlucky enough to be with one of the many lenders who have increased their interest rates by more than Bank Base Rate.

Ray Boulger, Senior Technical Manager at Charcol, comments: "There are still many borrowers in the UK who have their mortgage structured on an annual review basis. This means any interest rate changes over the course of the year are amalgamated and applied to the mortgage at the start of each New Year. As payments will have been calculated on a lower interest rate at the start of 2004, borrowers on annual review will have a shortfall to make up next year. With Base Rate increasing by 1% during 2004 borrowers on annual review will see a significant increase in their monthly payment next year."

Charcol estimates that many of these borrowers will be paying their lender’s Standard Variable Rate (SVR), which means there is a good chance for many to mitigate the rises they will suffer.

The difference between most lender’s SVRs and current market-leading deals is around 2%, and so it would be easy for borrowers to not only avoid an increase in payments but to actually reduce what they are paying, despite their current payments being based on last year’s interest rates.

If someone with a £100,000 interest only home loan on a 6.75% SVR simply accepts the terms of their annual review they are likely to pay around £565 each month next year, compared with £479 this year. This is an increase of £86 a month. If they remortgaged to a market-leading 3 year tracker at 4.75%**, they could potentially see their monthly payments shrink, even with the annual review increase, by around £80, to £399.

Boulger concludes, "Even those who are fully prepared for the leap in their mortgage payments would be foolish to not look at whether they are getting the very best value from their loan. Borrowers who do not have early repayment charges should contact their lender and ask what better deals they can offer, and then compare these deals with others in the market. Apathy on the largest financial commitment many of us will ever have just does not make sense."