Source: The Conversation —
Around 4 million UK households will face higher mortgage costs in 2023 with average monthly payments expected to increase from £750 to £1,000.
Banks’ lending rates are directly influenced by the Bank of England’s base rate, which rose nine times in the year to December 2022 to 3.5% and is expected to reach around 4.5% in 2023. Mortgage rates are even higher than this base rate because banks add a premium to account for the risk of borrowers not repaying their home loans. Average mortgage rates are now around 6% versus 1.9% in early 2022.
Households with variable-rate mortgages, which adjust as the base rate rises, are already feeling this change. But in 2023 around 1.8 million people with fixed-rate mortgages will come to the end of their current deals. They face an even greater shock because their payments will shoot up almost overnight.
Mortgage costs currently make up 22% of the average UK household budget, so it’s important for those looking for a new deal or trying to remortgage to understand how mortgage payments work. This will not only help you choose the best deal but could also help reduce your repayment burden.
How mortgage repayments work
Mortgage payment calculations are complex, so use a mortgage calculator (available from your bank or online). I used one to calculate repayments for John, a fictional homeowner borrowing £100,000 to buy a house worth £110,000 (so he has a £10,000 deposit). John chooses a one-year fixed-rate mortgage with a 2% interest rate and a repayment term of 20 years.
This is a repayment mortgage so John’s payments to the bank comprise two parts: the interest (the amount the bank charges John to lend him the money) and the capital repayment (which covers the total amount – £100,000 – the bank lent to John for his house).
His monthly payments will be nearly £506.
Looking at the breakdown of yearly payments, John will pay over £1,962 in interest for the year that his rate is fixed at 2% (marked in red below) – an average of £164 per month.
For the capital repayment, John will pay back just over £4,108 of the amount he borrowed (in blue above) in the year he has fixed his rate at 2%, for an average monthly capital payment of £342.
