As the Bank of England approaches the end of its sharpest interest rate tightening cycle since the 1980s, two-thirds of the impending £12bn increase in annual mortgage costs remains to be passed on, the Resolution Foundation revealed today.
The Foundation’s new research highlights the Bank of England’s twelfth consecutive decision to increase interest rates to 4.5% last Thursday, a rise of over four percentage points in less than 18 months. This marks the steepest rate increase since the late 1980s.
However, the eventual impact on households has been delayed, primarily due to the rising popularity of fixed-rate mortgage deals. These have surged from accounting for £4 of every £10 lent before the financial crisis to over £9 of every £10 lent last year. Consequently, the majority of the rate rise’s effect won’t be felt until the expiration of these deals.
The trend towards longer-term deals, with 5-year fixes becoming more popular than 2-year fixes between 2016 and 2022, has further delayed the impact. As a result, around half of the 7.5 million mortgagor households affected by the rate increase cycle since late 2021 are yet to experience a change in their mortgage rate.
According to market predictions, the average rate on new mortgages will remain above 4% until the end of 2026, suggesting that mortgage costs will stay elevated for a while. Consequently, households have so far only faced a third of the total £12bn annual rise in mortgage costs resulting from the current rate-rising cycle.
This year is expected to be particularly harsh for homeowners, with total repayments set to increase by £5.3bn between Q1 2023 and Q4 2024. Approximately 1.6 million households will see their fixed-rate deals expire, facing an average increase in their annual mortgage bill of around £2,300.
Richer households will bear the brunt of the £12bn rise in mortgage costs, with three-quarters of this increase falling on the richest two-fifths of households. However, the impact on living standards will be most significant for low-and-middle-income households affected by the rise.
Simon Pittaway, senior economist at the Resolution Foundation, warned: “Whilst interest rate rises might be coming to an end, there will be plenty more mortgage pain to come. Two-thirds of the £12bn a year increase in mortgage costs that British households face as a result of rising rates is still to come.
“People moving onto new fixed-rate deals over the next year can expect to see their annual mortgage costs rise by an eye-watering £2,300 – with young families and low-and-middle-income households with mortgages facing the biggest living standards hits.”
