Mortgage repayments are to surge by as much as £800 per month for the typical homeowner as financial markets bet on 6pc interest rates next year.
Borrowers are at risk of the sharpest increase in their bills since before the financial crisis as pressure mounts on the Bank of England to raise rates as soon as possible following a plunge in the pound and surge in the cost of servicing government debt.
Markets expect a series of sharp increases to take the headline rate to 6pc of above next year, the highest rate since 2000, in the wake of market chaos following the Chancellor Kwasi Kwarteng's mini-Budget. The Bank has attempted to rule out an emergency rate rise, but some traders believe an extra move may still be necessary before the next scheduled meeting of the Monetary Policy Committee in November.
Neal Hudson, analyst at BuiltPlace, estimates that around 375,000 people will roll off a fix in the second quarter of next year, when markets think the base rate will hit 6pc.
Someone who bought in the first half of 2021 – and so whose two-year fix expires next year, when the base rate could be 6pc – will see their monthly repayments jump from below £900 to £1,696, or £800. This amounts to £9,600 a year more.
It might not feel like it to house buyers straining every financial sinew to get on the property ladder in recent months, but in retrospect, they may see recent years as the glory days of home ownership.
Scraping together a big enough deposit has been tough as buyers have seen prices running away from them – the latest official data shows the average property was 15.5pc more expensive in July than it was a year earlier.
But at least interest rates have been low.
Late last year, the average buyer fixing for two years with a 25pc deposit could get a rate of 1.2pc. A five-year deal cost 1.3pc at its cheapest.
Back at the start of 2015, the average two year fix cost 2pc and a five-year fix was above 3pc.
The problem is that interest rates have risen sharply since the end of last year, even as buyers have been forced to pay more to get a home, meaning the higher rate is due on a much larger mortgage.
Bank of England figures show the average two-year and five-year fixes cost about the same by the end of August, at 3.6pc.
That followed a rise in the base rate from 0.1pc last December to 2.25pc last week.
Financial markets expect more rapid increases to come, squeezing anyone trying to buy a home even more brutally.
If the base rate increases from 2.25pc to 3pc before November, as some in financial markets expect, that would take the average rate on a two-year fix for someone with a 25pc deposit from 4.14pc to 4.89pc, according to calculations from Hamptons.
On an average property costing £295,750, that would mean the monthly bill rising by almost £100, from £1,188 to £1,283, in a matter of weeks.
If the base rate goes to 6pc next year, that points to a mortgage rate of 7.89pc and monthly repayments of £1,696 – a jump of more than £500.
It gets worse for someone who bought when rates were lower and is now at risk of a huge jump in costs when the time comes to find a new deal. There are plenty of these people as lower rates encouraged more people to lock in a good offer.
Andrew Wishart, property economist at Capital Economics, says the affordability on a new mortgage “would be almost as bad as the worst it got in 1989-1990 and worse than the financial crisis” if rates rise as much as markets expect.
The result will be a slump in the housing market, and potentially in the wider economy.
It comes at a time when the economy is already thought to be in recession and energy bills are, even with the Government’s expensive support plans, going to jump again next month.
History indicates that when bills mount, homeowners slash every other bit of spending they can in a desperate bid to pay the mortgage and keep a roof over their heads.
If they fail, or decide it is not worth it, then they will sell their homes. The extra supply from these forced or distressed sales in turn push down property prices further.
The scale of the impact of higher borrowing costs could squash the market even as the Government hopes its cut in stamp duty, which kicks in at £250,000 rather than £125,000 as of last Friday, will boost homebuyers.
Tom Bill, Head of UK Residential Research at estate agent Knight Frank, says the impact of higher mortgage costs “is going to eclipse that stamp duty cut quite quickly”.
“We expect quite firm downward pressure next year on prices as budgets start to get reined in.”
Capital Economics had predicted that house prices will fall 7pc in the next two years but Wishart says faster rate rises would mean heavier falls.
He says the Bank rate hitting 6pc could mean a 15pc slump in house prices but cautions that Threadneedle Street is unlikely to push borrowing costs so high.
This represents a painful blow to the typical households’ wealth, and a particularly major threat to the finances of anyone who has recently bought a home with a small deposit – someone with a mortgage worth 90pc of the value of their property on purchase could soon find themselves in negative equity, when the home is worth less than the loan.
Wishart suspects the Bank would not take things this far.
“This is definitely a potentially really bad scenario for the housing market. But the flip side is also will the Bank of England actually follow through?” he says.
“Historically, the Bank of England has never continued hiking interest rates after house prices have started to fall.”