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Many households 'at risk of becoming mortgage prisoners'

A new report compiled by the Resolution Foundation reveals one in ten of the UK's mortgagors faces becoming imprisoned by borrowing deals which are likely to make their repayments unaffordable.According to the study, as many as 770,000 households fall into two potentially problematic categories of mortgage borrowers. The first of these have limited abilities to switch to better deals to insulate themselves against further rate rises, while the second are at risk of becoming "highly-geared", with rate rises meaning their mortgages will take up one-third of their disposable income by 2018.Most vulnerable people are therefore doubly exposed, restricted in their ability to renegotiate borrowing and with outstanding debt levels that mean even a modest rise in interest rates by 2018 could put them into the highly-geared category.People who are most vulnerable will have little choice but to repay at their lender's standard variable rate, which means they will be fully exposed to changes in their bank's base rate. This rate could reach three per cent by 2018, whereas it currently stands at 0.5 per cent.A larger group, consisting of three million households, or more than a quarter of the UK’s 8.4 million mortgagors, could face unaffordable repayments by 2018 based on current market expectations for interest rates. Many people in this category will look to refinance and boost certainty to avoid facing affordability problems in their future.Matthew Whittaker, chief economist at the Resolution Foundation and author of the report, said the current era of low interest rates provides a window of opportunity to consider how to reduce the risk to the most vulnerable group."But that era is coming to an end relatively soon and the legacy of easy credit and the associated debt-overhang still has to be reckoned with," he added. "Financial institutions and policy-makers must consider now how best to minimise the scale of the adjustment problems these families face when interest rates start to return to normal." 

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