Losing the remortgage lottery is as bad as an 80% hike in energy bills

Sarah Coles, head of personal finance at Hargreaves Lansdown, comments on the Hargreaves Lansdown Savings & Resilience Barometer, showing losing the remortgage lottery is as bad as an 80% hike in energy bills.

Key points from publication:

• • Remortgaging in 2023 will swallow an extra 3.1% of your income after tax: that’s the equivalent of an 80% hike in your energy bills.
  • By the end of the year, more than a quarter (25.7%) of mortgage payers will be at risk of default: just over 2 million households, which is up 425,000 over the past 18 months.
  • 347,000 are at ‘critical risk’, because they don’t have the broader financial resilience to cope with this rise. They’re already spending more cash each month than they have coming in and they don’t have emergency savings to ease the remortgaging hit.
  • Singletons, younger people, Londoners and the self-employed will be particularly at risk.

Sarah Coles says:

“This year we face a remortgage lottery.

“The losers are those whose fixed deals run out by the end of the year, who’ll take a hit that’s equivalent to an 80% hike in their energy bills.

“Our modelling shows that 2 million households will be at risk of falling into arrears, but because the cost-of-living crisis has taken a massive toll on financial resilience – from savings to how much cash we have left over at the end of the month – almost a million people will be wrestling with even worse problems.

“It’s horribly unfair, because those who remortgage this year face significantly higher rates.

“Right now the  average five-year fixed rate has fallen to 5% and the average two-year fixed rate isn’t much higher (according to Moneyfacts), but this is a far cry from back when these people last remortgaged, when rates were fixed closer to 2%.

“To add to the sense of unfairness, if you’re lucky enough to have a rate running out in 2024 you’ll been in a much better position, because rates are expected to fall slowly during 2023, and then drop away faster in 2024.”

The risks to resilience:

“The extra cost is the equivalent of another 3.1% of your income after tax, which is going to be incredibly difficult for anyone to manage.

“However, the real risks tend to hit when your mortgage costs hit 25% of your household income after tax.

“Unfortunately there will be 2 million people in this position – up 425,000 over the past 18 months .

“The Barometer allows us to drill down into this overall figure, and look at people’s overall financial resilience – and the findings are even more alarming.

“We class 650,000  at ‘high risk’ because they are not only facing a dangerous hike in their mortgage payments, but they were already facing lower resilience in the first place, because they have less than the minimum recommended emergency savings (3 months’ worth of essential expenses) to fall back on.

“Another 347,000 are at ‘critical risk’, because on top of the mortgage hit and lower savings resilience, they are spending more cash each month than they have coming in.

“Their resilience has taken such a hit over the past year that they face an enormous struggle to withstand this extra pressure.”

Vulnerable groups:

“Hard-pressed singletons will be facing these horrendous hikes alone, so it’s little surprise that they’re three times more likely to be at high risk and more than five times as likely to be at critical risk than couples.

“There will also be newly single people, who have bought relatively recently after a separation or divorce, who have stretched their finances to breaking point in order to buy, and who face real threats from rising rates.

“Londoners are also more vulnerable – with 38.5% of those remortgaging this year being classed as at risk.

“Those in the south east aren’t much better off with more than 30% at risk. House prices in these areas shoulder the bulk of the blame, forcing buyers to spend a significant chunk of their income servicing their debts.

“Younger owners have also been forced to stretch themselves to get onto the property ladder.

“They tend to be in cheaper properties, but have bigger mortgages and higher monthly payments. Despite making up 46% of the market, Millennials and Gen Z will make up 61% of the increase in those at risk.

“Those baby boomers who still have a mortgage also face huge challenges. This is a relatively small group, and is likely to include those rebuilding after divorce, or who hit financial problems along the way that left them with a mortgage later in life.

“They may also have scaled back their work commitments and be managing on a lower income. As a result they’re one and a half times as likely to be at high risk and twice as likely to be at critical risk.

“Working patterns also affect how much danger remortgaging plunges you into. Self-employed remortgagers are more than twice as likely to be at high or critical risk than full time employees.

“This is particularly worrying given the fact their incomes tend to be more variable too.

“Meanwhile, part-time workers are almost three times more likely to be at high risk and more than four times as likely to be at critical risk.

“This may well be because other responsibilities mean they cannot work full time, so are managing on a lower household income when they’re hit with this remortgage blow.”

The Hargreaves Lansdown Savings & Resilience Barometer update on the risks of remortgaging is released today. It was put together with Oxford Economics and a copy is available on the Hargreaves Lansdown website.

Kindly shared by Hargreaves Lansdown

Main article photo courtesy of Pixabay