A 1% increase in interest rates could result in an 11% increase in monthly mortgage costs for those with repayment mortgages, insurance giant Aviva has warned.
Aviva said that those with interest only-mortgages could be worst hit with a 1% rise, potentially seeing a 25% increase in mortgage costs.
London homeowners carry the greatest cost burden, with a 1% increase potentially leading to a £265 increase in monthly interest-only mortgage costs from £1,058 to £1,323. This would force up annual payments for a typical London homeowner from £12,696 to £15,876.
Alistair McQueen, savings and retirement manager at Aviva, said: “We are experiencing an unprecedented period of stable and low interest rates. This has greatly reduced the cost of borrowing, especially for mortgage holders.
“For the one-and-a-half million people who have bought a property for the first time during this period, the idea of rising interest rates is an alien concept, but rising rates will come. These rises may still be some months away, but all homeowners should be sensitive to the potential impact they will have on their monthly expenditure.”
Last week, the Bank of England decided to keep interest rates at a record low of 0.5% for the 85th month in a row.
Chancellor George Osborne has warned that if the Britain leaves the EU mortgage rates could go up. He said that if the UK votes to leave, the pound could slump, which would force up the price of imports. This could lead to rising prices and inflation, which the Bank of England would have to counter by raising interest rates.
However, many analysts believe this is unlikely as the Bank would want to shore up confidence following a Brexit.
Over 1.5 million first-time buyers have taken out a mortgage since 2009 and have no experience of rising interest rates.
This has led to concerns that those in existing financial difficulty are unprepared for the interest rate hike and likely to be at the sharp end of a rise.
Previous research by the Building Societies Association found that 52% of borrowers say they will struggle when interest rates rise.
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