No doubt any first-time buyers who listened to Andrew Lilico, the Policy Exchange think-tank’s chief economist, on Monday will be hoping his predictions are way off course.
Lilico believes that the UK economy will be plunged back into recession next year. This double-dip recession would not last long he thinks but the after effects could be devastating. Inflation could surge to 10%, a level unseen in the UK since the end of the 1980s, and the Bank of England would need to increase the base lending rate up to about 8% which would have a knock on effect of increasing contractor mortgage rates to around 12%.
Meanwhile, as more and more people struggle to pay off their current mortgage, a new way to spread the cost has emerged. A number of mortgage lending companies, including HSBC and the Halifax, have scrapped the 25 year rule in favour of a 40 year mortgage. Whilst this may sound good, home owners taking up one of these deals could find themselves still paying off their mortgage when they’re in their 70s.
Extending the mortgage repayment period by a further 15 years also means the size of the interest bill soars. With a 4.5 interest rate, a £125,000 loan repayable over 25 years will cost £84,000 in interest on top of the principle amount borrowed. If however you extend the term to 40 years, that interest figure leaps up to over £144,000.
Lenders defend these new plans by saying few people will actually stick to the 40 year mortgage term. They expect borrowers to make additional lump sum repayments or have their deals re-calculated once their financial circumstances improve.
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Image: Banging my head against the wall by Brett L
