Mortgage bills to soar 27%

THE New Year will see mortgage bills soaring by as much as 27% for two million homebuyers. Some 600,000 of them are coming to the end of cheap fixed-rate deals and will be automatically transferred to much higher variable rates unless they take action.

A further 1.5m have annual review mortgages, where the rate of interest they pay is set each January.

Given that the Bank of England has increased the base rate by a total of 1 percentage point over the past year, to 4.75%, that can only mean a nasty shock in next month's accounts.

If the base rate stays the same, people whose cheap fixed-rate deals end in 2005 will see their monthly outlay rise by an average of 24%. But if the base rate goes up to 5%, as many analysts predict, the rise will be an average of 27%. In cash terms, the increase on the average monthly payment will be between £124 and £139.

Experts at City consultants Capital Economics calculate that consumers coming off fixed rates will have to pay £715m in extra interest over 2005.

The organisation says this punishing increase in the cost of housing will be a factor in what it predicts will be average property price falls of around 20% over the next two years.

Capital Economics property economist, Ed Stansfield, said: 'The sharp rise in mortgage payments faced by borrowers can only add to the downward pressure on house prices.'

People on annual review mortgages are facing a double blow. Not only will their new monthly repayments be substantially more than in the current year, they will also have to cover the interest they have effectively underpaid during this year. Someone with a typical £250,000 interest-only mortgage could see their £1,198 monthly repayment rise by £325.

The two million people involved can try to protect themselves against higher bills by remortgaging. But the discount and fixed-rate home loans currently on the market are substantially more expensive than those that were being offered two to three years ago.

Two years ago, it was possible to get a two-year fixed rate as low as 3.24%. Now major lenders are charging 5.49%. In any case, many people may not be able to remortgage without paying massive penalty charges to their current lender.