Unhappy new year for homeowners

Hundreds of thousands of homeowners face a hike in their monthly mortgage payments at the end of the year when the amount they pay comes up for review.

Just before last week's 0.25 per cent base rate increase - the fifth since November 2003 - the Nationwide building society warned that 2 per cent of homeowners were 'regularly having difficulties' with their mortgages, while 11 per cent were struggling with all types of debt. Alex Bannister, group economist for the Nationwide, says this number is likely to increase in the new year, when those whose mortgage payments are adjusted annually start having to pay more.

Most banks and building societies have stopped lending new mortgages on an 'annual review' basis, preferring to alter the premiums they collect as and when the Bank of England changes the base rate. But many borrowers still have old-style loans whose mortgage payments are recalculated just once a year.

Although they have been protected from the effects of the four interest rate hikes so far in 2004, the interest charged on their loans has risen in line with the base rate, so they are underpaying. The Yorkshire Building Society has calculated that, provided there are no more base rate rises this year, someone with an £80,000 mortgage is underpaying by an average £37.50 each month.

They will have to pay at least 17 per cent more from the beginning of next year just to allow for interest rate rises, and Simon Jones of independent mortgage broker Savills Private Finance warns some could face even bigger payments to make up shortfalls chalked up this year. 'When an account is recalculated for January 2005, it would need to factor in the rate rises that have occurred this year as well as any shortfall in payments. The bills that hit the mat in January could be 30-50 per cent higher.'

Nationwide stopped offering new annual review loans in 2001, but still has 100,000 customers whose mortgage payments are reviewed annually. It says it offers these customers the chance to switch to automatic payment changes every year when their mortgages are reviewed, but has no plans to contact them in the meantime.

Yorkshire Building Society, which reviews nearly all its mortgages annually, says customers prefer having just one payment change each year as it allows them to budget. Spokewoman Tanya Mills says the society is happy to recalculate payments now if mortgage customers want to make good any shortfall before the next annual review.

Norwich and Peterborough Building Society, most of whose mortgage customers still have their payments reviewed annually, is considering writing to offer an interim review. But Stephen Penlington, general manager of mortgages, says that even after the next review, customers with the society's average mortgage of £60,000 will only be paying £50 more each month.

Homeowners whose fixed-rate mortgages come to an end this autumn also face a hike in mortgage payments. David Hollingworth, of mortgage broker London & Country, says those who fixed two years ago when the cheapest rate was 4.49 per cent will have to pay £42 more each month for a £100,000 interest-only mortgage, or £29 for a repayment loan with a 25-year term, if they switch to the best two-year fixed rate available now - 4.99 per cent from Britannia Building Society.

Those who fixed last summer, when rates were as low as 3.25 per cent, face a much bigger hike in payments, particularly if they allow their rate to revert to their lender's standard variable rate, typically 6.5 per cent. Some lenders are selling loans designed to increase the rate in steps. Abbey is selling loans fixed at 4.49 per cent in the first year, 4.99 per cent in the second and 6.49 per cent in the third.

Hollingworth suggests a Yorkshire Building Society loan fixed at 5.69 per cent for three years, or a Leeds and Holbeck loan fixed at 5.29 per cent, also for three years, but which requires that borrowers buy Leeds and Holbeck buildings and contents insurance, otherwise the rate is increased by 0.24 per cent.

· For further information on mortgage deals contact London & Country on 01225 408000 or Savills Private Finance on 020 7330 8588