North-South divide goes deeper still: Northern borrowers will be hit harder by interest rate rise
Joe Wright, 9 April 2014
Six years ago, terrible mortgage lending practices brought Britain’s banks to their knees. Newcastle’s Northern Rock built itself up by offering irresponsible interest-only and 125% mortgages mainly to families in the North, helping them to avoid ‘burdensome’ deposits. After the credit crunch (the financial sector’s realisation of how deep and dangerous these practices had become), many customers across the UK were hit by huge rises in mortgage interest payments forcing more people into arrears and some into bankruptcy.
The housing market has shown signs of recovery since this trauma. House prices have recovered. But there is now a new danger to home-owners, especially in the North.
£26bn of outstanding mortgage borrowing is on properties in the north-east of England – the lowest of any region. Property is cheaper and people borrow less than their southern counterparts to buy. However, as a new report by Alla Koblyakova of Nottingham Trent University shows, people in the north-east will be hit hardest by a rise in interest rates. This is because Northerners (along with Scotland and Wales) are 78 per cent more likely to have a variable rate mortgage than southerners (35 per cent).
Fixed-rate mortgage-holders are protected for at least a while from a rise in the bank rate; variable-rate borrowers face an immediate increase. An increase is due in the next year, finally bringing interest rates up from 0.5 per cent (a 300-year low) owing to falls in inflation and unemployment to targets set by the Bank of England.
The report’s author has warned that ‘a rise to 1 per cent could mean an increase in the monthly bills of variable-rate borrowers of about £175.’ With many more borrowers in negative equity in the North, a hike in interest rates will put more in a precarious position. Possibly their lenders too.
Insolvency rates are higher in regions such as the North East. Households across the UK are also still under far more strain than in previous years: toward the end of last year, households’ saving ratio was at a low, down from 7.1 per cent in 2011 to 5 per cent (partly due to low interest rate disincentives to save) and accompanied by another fall in household disposable income.
The UK is again struggling to find ways of creating a sustainable and healthy housing market. Under supply of housing and rises in house prices (up to 9.5 per cent across the UK) are once again placing property beyond the means of many households, encouraging larger levels of debt and more volatile borrowing costs. The Bank of England and the Chancellor insist they are monitoring the market closely (the Bank of England has at least scaled back its Funding for Lending scheme for mortgage borrowing) but developments are worryingly familiar.