Mortgage payments to triple for 800,000 moving to new deals

Soaring house prices have resulted in falling rates of ownership and reshaped the electoral map

SOME 800,000 households will see their monthly mortgage payments almost triple this year.

An estimated 1.4m homeowners will have to remortgage, according to the Office for National Statistics (ONS).

Of these 57pc are currently repaying below 2pc, setting them up for steep increases when they move onto new deals. Banks are now charging on average 5.75pc for a two-year fixed and 5.57pc for a five-year fix, according to Moneyfacts.

Current rates mean 818,500 will see the cost of their loan almost triple when they remortgage, climbing from 2pc or below to well over 5pc. A homeowner with a 1.5pc 25-year mortgage on a property worth £250,000 will see their monthly repayments increase by £516 to £1,416 based on current rates.

The jump would add over £6,000 to the annual cost of a mortgage.

Repayments will rise by more than £1,000 a month for borrowers with a 1.5pc 25-year mortgage on a £500,000 property, climbing from £1,800 to £2,831. Higher rates will hit younger borrowers hardest, the ONS said, as many have mortgages with smaller loan-to-value ratios. Younger borrowers also tend to have less savings to fall back on.

The leap in housing costs will be less dramatic for families renewing deals in 2024, the ONS said. Many will be on two-year fixed deals taken out in 2022 when rates had already begun to rise.

Bank of England analysis published in December estimated that 6m people would face higher mortgage repayments by the end of 2025 through a combination of remortgaging and higher rates on variable loans.

Across all borrowers with deals expiring this year, the average household will pay £250 a month more, the Bank said, adding £1,000 to the annual cost of a mortgage. The effective interest rate on all outstanding fixed rate mortgages across the UK was 2.08pc in November 2022, according to the Bank of England.

Housing costs are rising after several aggressive rate rises by the Bank of England to tame inflation. Markets expect more increases in the months ahead.

‘The Prime Minister may have made a tactical error in pledging to halve inflation in the coming year’

Here’s a poser: why does the electorate keep giving the Conservative Party the benefit of the doubt? One thing’s for sure: it’s not the economy, stupid.

Ultimately, Britain has stagnated at best over the past decade and a half on most metrics. Since 2008, average real wages, productivity and business investment have all flatlined.

And yet, until very recently, the Tories appeared immune to political gravity. They increased their share of the vote at each of the last six general elections. At the last outing they managed to secure their biggest parliamentary majority since 1987.

There are probably enough complicated reasons explaining this phenomenon to fill a university library with doctoral theses. Brexit has sucked up most of the political oxygen for several years while the Labour Party endeavoured to plumb new depths of uselessness. But at least part of the answer has to be house prices.

From 2008 until the middle of last year, the value of the average house in the UK rose by 44pc across the whole of the country and by 56pc in London, according to the Land Registry’s UK house price index. Meanwhile, the Bank of England base rate was stuck at just 0.5pc for the best part of the decade. This meant a good chunk of the population felt like it was getting richer because, despite the prevailing economic doldrums, the value of their home kept inching inexorably higher and they were paying peanuts (historically speaking) to service their mortgage.

There has long been a clear correlation between home ownership and where voters place their “X” on polling day. At the last general election, 57pc of owner-occupiers voted Conservative and 22pc voted Labour. Of the 365 seats won by the Tories, a full 315 had home-ownership levels that were higher than the national average. This was true in just 33 of the 202 constituencies won by Labour.

Following the lead of Margaret Thatcher, who gave council tenants the right to buy their properties in the 1980s, there have been a host of schemes – including Help to Buy (introduced by George Osborne), First Homes, Help to Build, Lifetime Isas and multiple stamp duty holidays – which have stoked demand while doing little to expand supply.

The Conservatives got a lot of mileage out of this ploy but it was already becoming clear that they were running out of road. Soaring house prices had resulted in falling rates of home ownership, especially among the young (the average age of first time buyers in the last financial year was 34), and reshaped the electoral map.

For example, the Conservatives won a greater share of the vote in London than in the country at large in both 1987 and 1992. Now, with home ownership levels falling below 50pc, the capital has become a Labour stronghold. Just 31pc of private renters voted Conservative in 2019 compared with 46pc who voted Labour.

The Conservatives’ new planning Bill was an attempt to address the problem and increase house building by making it harder for local communities to block new schemes. But even before it was watered down, it was questionable whether the rule changes would have made a material difference to the housing market in the short to medium term.

In the meantime, around three million households are due to renew their mortgages in the coming financial year.

Since December 2021, the average interest rate on a two-year fixed mortgage has soared from 2.34pc to 5.75pc. That will add £377 a month, or £4,524 a year, to the cost of a £200,000 mortgage. The Office for National Statistics recently calculated that the mortgage rates of over 800,000 British households will more than double this year as their low fixed-rate deals expire.

It’s true that those households with mortgages tend to be on better incomes than those who are renting and would be able to absorb this increase.

However, the average covers a wide spectrum. New research from the Resolution Foundation shows that households with a mortgage will suffer a 12pc hit on their earnings equal to around £4,400 by the spring of next year. This means millions of mortgage holders face losing roughly an eighth of their income to higher borrowing costs in the coming months.

Young borrowers, who are likely to have scraped together every last penny for a deposit to get on the housing ladder when prices were sky high will be the worst hit as they’re unlikely to have savings to fall back on. Many voters have been conditioned to believe low interest rates are the norm.

Of course, not all of the blame for this can be placed at the feet of the Conservatives. But it’s unlikely that voters will quickly forget how mortgage rates shot up following Liz Truss and Kwasi Kwarteng’s disastrous mini-budget, nor that Rishi Sunak and Jeremy Hunt will be able to sufficiently distance themselves from the debacle.

Indeed, the Prime Minister may have made a tactical error in pledging to halve inflation in the coming year. The Government has repeatedly (and, in fairness, correctly) said there’s little it can do to control spiralling prices. By now (incorrectly) suggesting he can tame it, Sunak risks attracting more than his fair share of blame for both inflation and the high interest rates required to tackle it.

Nearly two thirds of the households in the UK are owner-occupiers. Some 35pc of households are outright owners and are therefore shielded from rising mortgage rates and can weather the coming fall in house prices. But 30pc of households are owners with mortgages, who are not. The dividing line in British society is likely to move from being homeowners versus renters to outright owners versus the rest.

Traditionally, the rise of home ownership was seen to be a positive for the Tory party as it gives more voters a stake in the economy. But in the two years leading up to the next election, that strength could very quickly become a liability.

It is a standard trope in literature – be it the Greek myths, Shakespeare plays or Marvel comics – that a protagonist’s defining attributes so often can also be the source of their undoing. Strengths become fatal weaknesses. It looks like the Conservative Party may soon be adding to the canon.