Millions face becoming 'mortgage prisoners' as interest rate rises to just 3% would make loans unaffordable

• 770,000 vulnerable households may struggle to renegotiate their mortgage payments when rates start to rise
• Base rate forecast to rise early next year
• One in ten mortgage holders could be trapped by unaffordable repayments

By RACHEL RICKARD STRAUS

PUBLISHED: 10:15 GMT, 20 May 2014 | UPDATED: 15:43 GMT, 20 May 2014

 
 
 
 

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Millions of homeowners risk becoming ‘mortgage prisoners’ as interest rates start to rise, an independent think tank has warned. 

As many as one in ten mortgage holders could be trapped by unaffordable repayments as interest rates rise over the next four years, the Resolution Foundation said. 

Around 1.1million households are already facing unaffordable repayments today, and this could almost double to 2.3 million by 2018, based on current market expectations for interest rates. 

Mortgage prisoners: Rising interest rates could trap one in ten households, as they will find themselves unable to afford their home loans

Many of those facing affordability problems could look to refinance to secure some certainty over future payments. But there will still be an outstanding number who are unable to refinance and face significant problems as rates rise.

More...

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• Inflation back up: Modest rise to 1.8% in April suggests long slow recovery in living standards
• House price growth slows slightly ONS data shows but are still up 8% in a year
• Can you find a better deal? Mortgage tables

The study modelled the impact on households of an increase in the base rate from its current record low of 0.5 per cent to a predicted three per cent by 2018. 

This puts rates at a far lower level than the 5 per cent level seen as the recent historic average in the decade running up to the financial crisis.

It found that around 770,000 vulnerable households will suffer from a limited ability to switch to a better deal and face the likelihood of their monthly repayments eating up at least a third of their disposable income. 

It termed this type of households as ‘highly geared’. 

These households could face difficulties renegotiating their borrowing ether because they have very low equity in their home (less than five per cent) or because they are self-employed or have interest-only mortgages, categories that make borrowers less attractive to mortgage providers. 

The report found that these homeowners would have little option but to repay at their lender’s standard variable rate, leaving them fully exposed to any increases in the base rate. 

The study predicts that this rise will begin early next year and will increase monthly repayments at the same time as lenders are setting more stringent conditions on borrowing. 

Homeowners have benefited from six years of unprecedentedly low monthly rates, which have meant many have been able to keep up with payments despite falls in real wages and household incomes. 

A household with a tracker mortgage of £75,000 over this six-year period has netted a cumulative gain of around £12,800, compared with the cost of meeting the same mortgage before 2008. 

The proportion of households facing difficulty paying their mortgage has risen despite a rock-bottom base rate (Source: Resolution Foundation)

But if rises in incomes fail to keep up with increases to interest rates, households with high repayments could struggle. 

The report comes after the Bank of England governor Mark Carney warned that a ‘big debt overhang’ is building up in the UK thanks to the booming housing market. 

He warned the market has ‘deep structural problems’ that mean it represents the ‘biggest risk’ to the nation’s economic recovery. 

Although weekly earnings are predicted to rise to 2018, they are not forecast to reach pre-crash levels in this time frame, even though mortgage rates will rise (Source: Resolution Foundation)

He says the Bank is keeping a close eye on the market to see whether the rise in mortgage lending has the potential to destabilise the economy, and also expressed concern that borrowers are taking on mortgage debts that would suddenly become unaffordable when interest rates rise.

He also suggested the Bank is ready to wade in to the housing market if it finds that borrowers are taking on more than they can afford.

In an interview with Sky News he said: 'The biggest risk to financial stability, and therefore to the durability of the expansion - those risks centre in the housing market and that's why we are focused on that.’

The Resolution Foundation study also found that London and eastern England are most exposed to the affordability risk. An estimated 35 per cent of households will spend at least a third of their disposable income on repayments in 2018, compared with 18 per cent in Scotland and 19 per cent in Yorkshire and Humber.

The proportion of high loan-to-value loans surged just prior to the financial crash (Source: Resolution Foundation)

Northern Ireland is also the region where low equity is most common. According to the study 35 per cent of mortgagors have less than five per cent equity in their home, compared to just two per cent in London. 

Matthew Whittaker, chief economist at the Resolution Foundation and author of the report, called for greater consideration to be given to reducing the problems that rate rises will cause.

He said: ‘Many borrowers have enjoyed spectacular savings over recent years, with mortgage rates falling to historic lows, and most will be able to ride the tide of gradually rising interest rates.

‘But for around one in four, even modest rate rises could create financial difficulties. Those at greatest risk are members of this group who also find themselves unable to access the best deals in the market today. 

+6

Mortgage affordability testing is now considerably more stringent than before the crash, and is likely to get even tougher in the coming months (Source: Resolution Foundation)

‘Almost one in 10 households are doubly exposed: facing the prospect of their mortgage becoming increasingly unaffordable in the future and with the market offering them limited, if any, choice today.

‘There is still a window of opportunity to think creatively about the best way of reducing the risk to this vulnerable group while we still have ultra-low interest rates. But that era is coming to an end relatively soon and the legacy of easy credit and the associated debt-overhang will have to be reckoned with.

‘Financial institutions and policy-makers must consider now how best to minimise the scale of the adjustment problems these families face when interest rates start to return to normal.’

Read more in source : http://www.dailymail.co.uk/money/mortgageshome/article-2633710/Millions-face-mortgage-prisoners-says-Resolution-Foundation.html#ixzz32bm5h6N3

The 5% savings rate trick: Best interest-paying current accounts to make your money work harder

By AMY ANDREW

PUBLISHED: 08:26, 26 April 2013 | UPDATED: 12:06, 13 May 2014

 
 
 

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Current accounts that pay out interest on your balance are few and far between nowadays - but once you know where to look, there are some good options available.

Savings rates are at an all-time low, providing a good incentive for checking out alternative ways to make your money work harder - you could be earning as much as 5 per cent on your in-credit bank balance every month.

We have scoured the small print to round-up the best interest-paying accounts. This page is kept up-to-date throughout the year - bookmark it for the very latest developments.

Free money: We pick the best of the interest-paying current accounts

Nationwide - 5% interest

Nationwide is offering the highest available interest rate on a current account.

Best interest rate

Nationwide's FlexDirect account pays out 5 per cent in-credit interest on balances up to £2,500 for the first year - not bad considering most easy-access savings rates have slid in recent years.

Account holders are also eligible for a 0 per cent overdraft for the first 12 months, and reduced fees of 50p per day for arranged overdrafts after that.

You must pay in a minimum monthly income of £1,000. On the last day of every month Nationwide will calculate the interest you've earned each day and then pay you this interest on the first day of the next month. 

Nationwide normally pays this interest 'net' of any tax, which means it deducts any tax due and passes it to the government for you.

Plus, if you’re accepted, you'll be eligible for the Nationwide Select credit card. It gives 0.5 per cent cashback, cheap overseas spending and other perks.

Watch out

If your income drops and you can't pay in £1,000, you won't receive any interest that month. 

The 5 per cent interest deal ends after a year, when it drops to just 1 per cent. So it may be worth looking elsewhere after the 12 months for a better return on your money. 

You get an interest-free arranged overdraft for that 12 months, but after that a flat rate charge of 50p per day applies, this will be costly for those who regularly go overdrawn compared to a typical interest-charging overdraft.

Unarranged overdrafts cost 50p per day for balances under £10 and £5 per day after that, capped at £60 per month.

If you like to carry out your banking face-to-face, this account might not be good for you because you can only access internet or telephone services as a FlexDirect customer.

This is Money verdict

   

Accounts that are good for both in-credit and overdrawn customers are few and far between. This account is a market-leading option for the first 12 months, but you may want to switch to another account once the introductory offers have gone. 

• Interested? Check out the full details on Nationwide's FlexDirect account

Lloyds Bank - 4% interest

Best interest-paying current account for rate-chasing savers.

Best for boosting your earnings

The Club Lloyds account is open to both new and existing customers and pays 1 per cent on in-credit balances of between £1 and £1,999, 2 per cent up to £3,999 and 4 per cent up to £5,000 for an unlimited period.

The bank allows one account per person, but couples taking out a joint account could boost their earnings further.

Two single accounts, plus a joint account, with a £5,000 balance in each, would earn £588 of interest a year.

Account holders also have access to a monthly saver account paying 4 per cent, with a £400 monthly paying-in allowance, pay in the maximum to this and you could get £103 a year in interest.

Account holders can choose between a free annual magazine subscription, a Gourmet Society discount-dining card or six cinema tickets a year. 

The account also offers a 0.2 per cent rate cut on Lloyds Bank mortgages and comes comes with a £100 fee-free planned overdraft.

Watch out

One drawback is that the bank charges a £5 monthly fee unless £1,500 is deposited into the account each month. On top of this you must set up two direct debits.

Any planned borrowing beyond the first £100 and unplanned overdrafts costs £6 a month. Straying beyond the agreed limit will incur 19.94 (EAR) per cent.

The bank does however offer a grace period for you to correct any mistakes. It gives until 3:30pm the next day before it applies any charges.

This is Money verdict

For most people on average salaries with average outgoings opening three accounts and two regular savers might be a little unrealistic. 

But ploughing £15,000 each year into the three accounts and £400 a month into two regular savers could make you £897 in interest. Your total return would be 3.05 per cent - almost matching the best five-year fixed rate savings account on the market while having easy access to your cash.

• Interested? Check out the full details on the Club Lloyds account

TSB also offers an interest paying current account

Although Lloyds Bank pays interest on a larger balance, TSB's Plus Account could actually match the earnings if you take out two accounts.

It pays 5 per cent on balances of up to £2,000 earning up to £80 after 20 per cent tax and £60 for higher rate payers. But it has the added bonus of allowing two accounts per person.

A £4,000 balance across two Plus Accounts would benefit from 5 per cent interest - while the interest tiers on the Lloyds account mean that the first £3,999 only receives 2 per cent interest.

TSB also requires a much smaller monthly deposit of just £500.

Find out more about the account here.

• Interested? Check out the full details on the TSB Plus Account here
  

Santander: offers the best current account for cashback

Santander - 1 to 3% interest and perks

The Santander 123 current account is an intriguing proposition, it pays both cashback on spending and interest on balances. But it also charges a fee.

Interest on savings and extras

With savings rates stuck at all-time lows, this account could also be a good alternative to savings accounts - the bigger your balance, the more interest is paid on the account. 

To start with, for credit balances of £1,000 or more, the 123 account will pay an AER of 1 per cent on the entire balance.

Once your balance reaches £2,000 or more, you will earn interest of 2 per cent, and if it reaches £3,000, the maximum interest of 3 per cent will kick in. Interest is clocked up on a daily basis and will depend on what you have in your account that day.

If your balance falls below £1,000 on any day of the month - even by £1 - you will earn no interest at all on the entire balance for that day.

Cashback

As well as the potentially high interest benefits, the 123 account could be a smart choice because it really makes your money work for you, thanks to monthly cashback on key services such as mortgage payments, council tax bills, electricity, gas, mobile and home phone, broadband and TV packages. 

Explaining how the cashback system works is a little long-winded - but stick with us, it is far from complicated and simply means there are lots of different ways to make money!

If money back on your bills is the reason you want to switch, check first that your supplier is eligible - not all are included in the scheme, particularly smaller energy firms. All bills must also be paid by direct debit.

As you might expect, the 123 aspect of the account name is a running theme. As well as spelling out what interest rates you are entitled to (1 per cent, 2 per cent and 3 per cent) on your balance, it also sets out the cashback theme on services.

This includes 1 per cent on your Santander mortgage (up to maximum monthly mortgage payments of £1,000), and on any spend on water and council tax bills that come out of the account.

Electricity and gas bills generate 2 per cent, with 3 per cent from spending on mobile, home phone, broadband and paid-for TV packages.

Household bills exclude your TV licence, maintenance/insurance contracts, commercial use or commercial mortgages.

Both interest and cashback you earn is paid directly back into your 123 account on a monthly basis.

Watch out

There is a monthly fee of £2, and to be eligible for cashback services you must set up a minimum of two direct debits and pay in at least £500 every month. But to get the most benefit from this account, it's best to retain a credit balance of at least £1,000 - this might be easier if you are a couple sharing the account with two salaries.

This account is really not for you if you often find yourself in the red. Arranged overdrafts are charged at £1 a day, capped at 20 days a month. Unarranged overdrafts shoot up to £5 a day with no cap on unauthorised borrowing. 

Santander says that you will not be charged more than £95 in fees for any one month. At the moment they are also offering a free arranged overdraft for four months if you switch to the 123 account using their switcher service. The size of the overdraft will depend on your circumstances. 

This is Money verdict

Santander's 123 really does offer something different and rewards both saving and spending. If there is any chance of you slipping into your overdraft, there is little point applying for the account as the combined charges and monthly fee are likely to cancel cash benefits. 

Prospective account holders can be new customers or already bank with Santander. However, even if you are won over by the range of benefits included in this account, recent negative reports surrounding Santander's customer service could put you off taking the leap.

Halifax - £5 a month

Halifax offers an alternative for those looking for an interest-paying current account as it offers a cash incentive to join and £5 per month

Regular cash each month and money to sign up

Halifax offers a lump sum, £100, to new customers who take out a Current Account, Reward Current Account or Ultimate Reward Current Account.

If you chose to go for the popular Reward Current Account you can also get £5 every month when you pay in at least £750 monthly.

That’s an extra £60 a year on top of the cash lump sum of £100, which is paid as soon as you apply.

To put this into context, £60 per year on an average £1,000 balance is 6 per cent, whereas on a £2,000 balance it is 3 per cent.

The other bonus with this account is that it comes with a six-month interest-free arranged overdraft should you need it. Depending on your situation this could be up to £5,000.

Cashback

The bank has recently added a new incentive to its current accounts offering between five and 15 per cent cashback on your shopping in certain stores. There is no cap on the amount you can earn.

Currently there are partnerships with Morrisons, Hertz, Ocado, Glasses Direct, Argos, Urban Outfitters, Homebase, Oasis, O2, Domino’s Pizza, Pets at Home, Marriott, Play.com, Q-Park, New Look and The Body Shop.

Halifax credit card customers will also be able to clock up on cashback, as long as they also hold a current account with the bank.

Existing customers will also be able to access the deals from their online banking account from mid-September according to the bank.

Read more in source : http://www.thisismoney.co.uk/money/saving/article-2313021/Best-paying-current-accounts.html#ixzz31fMSvaWw

The 5% savings rate trick: Best interest-paying current accounts to make your money work harder

By AMY ANDREW

PUBLISHED: 08:26, 26 April 2013 | UPDATED: 12:06, 13 May 2014

 
 
 

22 shares

45

View
comments

Current accounts that pay out interest on your balance are few and far between nowadays - but once you know where to look, there are some good options available.

Savings rates are at an all-time low, providing a good incentive for checking out alternative ways to make your money work harder - you could be earning as much as 5 per cent on your in-credit bank balance every month.

We have scoured the small print to round-up the best interest-paying accounts. This page is kept up-to-date throughout the year - bookmark it for the very latest developments.

Free money: We pick the best of the interest-paying current accounts

Nationwide - 5% interest

Nationwide is offering the highest available interest rate on a current account.

Best interest rate

Nationwide's FlexDirect account pays out 5 per cent in-credit interest on balances up to £2,500 for the first year - not bad considering most easy-access savings rates have slid in recent years.

Account holders are also eligible for a 0 per cent overdraft for the first 12 months, and reduced fees of 50p per day for arranged overdrafts after that.

You must pay in a minimum monthly income of £1,000. On the last day of every month Nationwide will calculate the interest you've earned each day and then pay you this interest on the first day of the next month. 

Nationwide normally pays this interest 'net' of any tax, which means it deducts any tax due and passes it to the government for you.

Plus, if you’re accepted, you'll be eligible for the Nationwide Select credit card. It gives 0.5 per cent cashback, cheap overseas spending and other perks.

Watch out

If your income drops and you can't pay in £1,000, you won't receive any interest that month. 

The 5 per cent interest deal ends after a year, when it drops to just 1 per cent. So it may be worth looking elsewhere after the 12 months for a better return on your money. 

You get an interest-free arranged overdraft for that 12 months, but after that a flat rate charge of 50p per day applies, this will be costly for those who regularly go overdrawn compared to a typical interest-charging overdraft.

Unarranged overdrafts cost 50p per day for balances under £10 and £5 per day after that, capped at £60 per month.

If you like to carry out your banking face-to-face, this account might not be good for you because you can only access internet or telephone services as a FlexDirect customer.

This is Money verdict

   

Accounts that are good for both in-credit and overdrawn customers are few and far between. This account is a market-leading option for the first 12 months, but you may want to switch to another account once the introductory offers have gone. 

• Interested? Check out the full details on Nationwide's FlexDirect account

Lloyds Bank - 4% interest

Best interest-paying current account for rate-chasing savers.

Best for boosting your earnings

The Club Lloyds account is open to both new and existing customers and pays 1 per cent on in-credit balances of between £1 and £1,999, 2 per cent up to £3,999 and 4 per cent up to £5,000 for an unlimited period.

The bank allows one account per person, but couples taking out a joint account could boost their earnings further.

Two single accounts, plus a joint account, with a £5,000 balance in each, would earn £588 of interest a year.

Account holders also have access to a monthly saver account paying 4 per cent, with a £400 monthly paying-in allowance, pay in the maximum to this and you could get £103 a year in interest.

Account holders can choose between a free annual magazine subscription, a Gourmet Society discount-dining card or six cinema tickets a year. 

The account also offers a 0.2 per cent rate cut on Lloyds Bank mortgages and comes comes with a £100 fee-free planned overdraft.

Watch out

One drawback is that the bank charges a £5 monthly fee unless £1,500 is deposited into the account each month. On top of this you must set up two direct debits.

Any planned borrowing beyond the first £100 and unplanned overdrafts costs £6 a month. Straying beyond the agreed limit will incur 19.94 (EAR) per cent.

The bank does however offer a grace period for you to correct any mistakes. It gives until 3:30pm the next day before it applies any charges.

This is Money verdict

For most people on average salaries with average outgoings opening three accounts and two regular savers might be a little unrealistic. 

But ploughing £15,000 each year into the three accounts and £400 a month into two regular savers could make you £897 in interest. Your total return would be 3.05 per cent - almost matching the best five-year fixed rate savings account on the market while having easy access to your cash.

• Interested? Check out the full details on the Club Lloyds account

TSB also offers an interest paying current account

Although Lloyds Bank pays interest on a larger balance, TSB's Plus Account could actually match the earnings if you take out two accounts.

It pays 5 per cent on balances of up to £2,000 earning up to £80 after 20 per cent tax and £60 for higher rate payers. But it has the added bonus of allowing two accounts per person.

A £4,000 balance across two Plus Accounts would benefit from 5 per cent interest - while the interest tiers on the Lloyds account mean that the first £3,999 only receives 2 per cent interest.

TSB also requires a much smaller monthly deposit of just £500.

Find out more about the account here.

• Interested? Check out the full details on the TSB Plus Account here
  

Santander: offers the best current account for cashback

Santander - 1 to 3% interest and perks

The Santander 123 current account is an intriguing proposition, it pays both cashback on spending and interest on balances. But it also charges a fee.

Interest on savings and extras

With savings rates stuck at all-time lows, this account could also be a good alternative to savings accounts - the bigger your balance, the more interest is paid on the account. 

To start with, for credit balances of £1,000 or more, the 123 account will pay an AER of 1 per cent on the entire balance.

Once your balance reaches £2,000 or more, you will earn interest of 2 per cent, and if it reaches £3,000, the maximum interest of 3 per cent will kick in. Interest is clocked up on a daily basis and will depend on what you have in your account that day.

If your balance falls below £1,000 on any day of the month - even by £1 - you will earn no interest at all on the entire balance for that day.

Cashback

As well as the potentially high interest benefits, the 123 account could be a smart choice because it really makes your money work for you, thanks to monthly cashback on key services such as mortgage payments, council tax bills, electricity, gas, mobile and home phone, broadband and TV packages. 

Explaining how the cashback system works is a little long-winded - but stick with us, it is far from complicated and simply means there are lots of different ways to make money!

If money back on your bills is the reason you want to switch, check first that your supplier is eligible - not all are included in the scheme, particularly smaller energy firms. All bills must also be paid by direct debit.

As you might expect, the 123 aspect of the account name is a running theme. As well as spelling out what interest rates you are entitled to (1 per cent, 2 per cent and 3 per cent) on your balance, it also sets out the cashback theme on services.

This includes 1 per cent on your Santander mortgage (up to maximum monthly mortgage payments of £1,000), and on any spend on water and council tax bills that come out of the account.

Electricity and gas bills generate 2 per cent, with 3 per cent from spending on mobile, home phone, broadband and paid-for TV packages.

Household bills exclude your TV licence, maintenance/insurance contracts, commercial use or commercial mortgages.

Both interest and cashback you earn is paid directly back into your 123 account on a monthly basis.

Watch out

There is a monthly fee of £2, and to be eligible for cashback services you must set up a minimum of two direct debits and pay in at least £500 every month. But to get the most benefit from this account, it's best to retain a credit balance of at least £1,000 - this might be easier if you are a couple sharing the account with two salaries.

This account is really not for you if you often find yourself in the red. Arranged overdrafts are charged at £1 a day, capped at 20 days a month. Unarranged overdrafts shoot up to £5 a day with no cap on unauthorised borrowing. 

Santander says that you will not be charged more than £95 in fees for any one month. At the moment they are also offering a free arranged overdraft for four months if you switch to the 123 account using their switcher service. The size of the overdraft will depend on your circumstances. 

This is Money verdict

Santander's 123 really does offer something different and rewards both saving and spending. If there is any chance of you slipping into your overdraft, there is little point applying for the account as the combined charges and monthly fee are likely to cancel cash benefits. 

Prospective account holders can be new customers or already bank with Santander. However, even if you are won over by the range of benefits included in this account, recent negative reports surrounding Santander's customer service could put you off taking the leap.

Halifax - £5 a month

Halifax offers an alternative for those looking for an interest-paying current account as it offers a cash incentive to join and £5 per month

Regular cash each month and money to sign up

Halifax offers a lump sum, £100, to new customers who take out a Current Account, Reward Current Account or Ultimate Reward Current Account.

If you chose to go for the popular Reward Current Account you can also get £5 every month when you pay in at least £750 monthly.

That’s an extra £60 a year on top of the cash lump sum of £100, which is paid as soon as you apply.

To put this into context, £60 per year on an average £1,000 balance is 6 per cent, whereas on a £2,000 balance it is 3 per cent.

The other bonus with this account is that it comes with a six-month interest-free arranged overdraft should you need it. Depending on your situation this could be up to £5,000.

Cashback

The bank has recently added a new incentive to its current accounts offering between five and 15 per cent cashback on your shopping in certain stores. There is no cap on the amount you can earn.

Currently there are partnerships with Morrisons, Hertz, Ocado, Glasses Direct, Argos, Urban Outfitters, Homebase, Oasis, O2, Domino’s Pizza, Pets at Home, Marriott, Play.com, Q-Park, New Look and The Body Shop.

Halifax credit card customers will also be able to clock up on cashback, as long as they also hold a current account with the bank.Existing customers will also be able to access the deals from their online banking account from mid-September according to the bank.

Read more in source : http://www.thisismoney.co.uk/money/saving/article-2313021/Best-paying-current-accounts.html#ixzz31fMSvaWw