Mortgage rises to wipe an eighth off incomes

Higher interest rates will sting property owners with average 12pc blow to household incomes

Millions of mortgage holders face losing an eighth of their income to higher borrowing costs after a jump in interest rates. The average household with a mortgage will suffer a 12pc squeeze on earnings equal to £4,400 by 2024, according to the Resolution Foundation think tank. It follows rate rises by the Bank of England. Since December 2021, the average interest on a two-year fix has surged from 2.34pc to 5.75pc – adding £377 a month to the cost of a £200,000 mortgage.

MILLIONS of mortgage holders face losing an eighth of their income to higher borrowing costs after a jump in interest rates to fight inflation.

The average household with a mortgage will suffer a 12pc squeeze on their earnings equal to around £4,400 by spring 2024, according to a report by the Resolution Foundation think tank. It follows a series of punishing rate rises by the Bank of England.

Since December 2021, the average interest on a two-year fix has surged from 2.34pc to 5.75pc – adding £377 every month to the cost of a £200,000 mortgage.

Three million households will have to renew their mortgages over the next financial year, or are on rising variable rates, and are likely to see hefty increases in their monthly outgoings, according to the Resolution Foundation which also said that Britain is likely only halfway through the cost of living crisis despite signs that inflation is now starting to ease.

Lalitha Try, one of the report’s authors, said: “Some economists might be looking at the cost of living crisis as something that is getting better, whereas our forecasts show it’s very much a two-year crisis.

“Actually, average incomes are set to fall more in the next year than they have this current financial year. I think that’s probably something that people may not have realised.”

Although mortgage holders face a bigger blow in cash terms, the average household will become £2,100 – or 7pc – poorer over two years from doubledigit inflation, frozen tax thresholds and higher energy costs, according to the Resolution Foundation.

However, households with mortgages on average also have much better incomes than other families, which will cushion some of this blow.

Ms Try said: “Although it is a big hit to their incomes, their incomes were higher to begin with.”

In fact, the era of low interest rates meant borrowers’ incomes went from being 16pc higher than average in 2007-2008 to 30pc in 2021-2022.

This living standards premium will slip back to 22pc by 2024-25 as a result of higher rates.

The analysis also illustrates how the cost of living crisis has increased the financial strain on households across Britain, with the authors warning that millions are already struggling to cope.

In a survey of more than 10,000 people in November, one in nine – or 11pc – said they had been hungry but could not afford to eat in the past month. This is twice as high as before the pandemic.

Close to a quarter also said that if their fridge broke they could not afford to repair or replace it – three times higher than previously. Also, increasing numbers of poorer families have pawned belongings or racked up debts.

However, while inflation is starting to rise more slowly, respite is still way off.

Ms Try said: “Incomes have fallen really quickly, but they’re going to take a lot longer to recover. By 2027, average incomes are still set to be lower than they were in 2019 before the pandemic.”

However, there is a glimmer of hope in the form of rapidly falling gas prices which, if sustained, could bring down inflation faster than expected.

Analysis from the Centre for Economic Policy Research (CEPR) today predicts this could save the public coffers as much as £13bn and wipe nearly 3 percentage points off inflation.

Wholesale gas prices have fallen sharply in recent weeks and reached £1.80 per therm on Thursday, bringing them below the pre-ukraine invasion level. According to the CEPR, if whole- sale prices stay at this lower level, it will cancel out an estimated 1.7-point boost to inflation from April from a reduction in taxpayer support.

It would also pull price rises down by a further 1.2 points.

The authors behind the analysis said: “This would help the Bank of England a great deal in reducing inflationary pressures and could lead to a lower peak in interest rates and less collateral damage in the economy.”

‘Unlike some economists, our forecasts show that the cost of living crisis is very much a two-year crisis’