Inf lation and mortgage bills could go through the roof

FAMILIES are facing a brutal squeeze on their finances as inflation threatens to hit a 30-year high, prompting soaring interest rates.

The cost of living could surge past 5 per cent next year, the Office for Budget Responsibility warned, if supply chain bottlenecks and staff shortages prove more persistent than expected.

To tame inflation, the Bank of England may be prompted to raise its base interest rate from its record low of 0.1 per cent to 3.5 per cent by 2023, the OBR added.

This would take interest rates to a level not seen since 200 , and would hammer households on variable mortgages.

Traders are betting on an increase of 0.25 per cent as soon as next week, when the Bank’s rate-setting committee meets.

In the OBR’s worst case scenario, anyone currently paying a 4 per cent interest rate on a 25-year £150,000 mortgage would see their monthly bill shoot up by more than £300 if their rate increased in line with the Bank rate.

Inflation, which was at 3.1 per cent in September but is expected to rise into the winter as energy bills climb, is already hitting households when combined with tax increases announced by the Chancellor.

Paul Johnson, director of think tank the Institute of Fiscal Studies, said: ‘The coming year will be a difficult one for living standards. For example, for middle earners, rising inflation and tax rises mean their real take-home pay is set to fall by around 1 per cent.’

For the average middle-income household, this would see them pocketing £1 0 less per year in real terms.

Under OBR’s most likely forecast, inflation will peak at 4.4 per cent in the spring, and will return quickly to the Bank of England’s 2 per cent target as pandemic pressures ease and energy prices stabilise.

The Lib Dems calculated last night that this would mean an increase of about £300 a year on the typical mortgage.

Leader Sir Ed Davey warned homeowners were facing their biggest threat since the 200 financial crisis, saying: ‘Homeowners face the toxic cocktail of interest rate rises, house prices surges, and council tax hikes just around the corner.’