The upward trend in mortgage costs could significantly disrupt retirement plans and pension incomes for numerous workers and savers, warns Gary Smith, partner in financial planning at UK wealth manager Evelyn Partners.
Smith highlighted the potential adverse effect of increased housing costs on both mortgage borrowers and renters, suggesting it could destabilise saving habits and retirement plans. He said: “Such a sudden ratcheting up of housing costs is bound to have a disruptive effect on saving, and on some savers’ plans for retirement – particularly if the new rates environment is less transitory than expected.”
He further noted that, given the state of public finances, it’s understandable that Prime Minister Rishi Sunak is unable to extend the fiscal commitments that mitigated the impact of the pandemic and the cost-of-living crisis. Therefore, households should be prepared to deal with the borrowing crisis independently.
The potential fallout of the current mortgage cost situation could reach all generations, from younger savers aspiring to homeownership reducing pension savings, to middle-aged individuals taking on extensive mortgages that extend beyond the state pension age, to those nearing retirement and struggling to estimate how long their pension savings will last.
Moneyfacts confirmed yesterday that the average 2-year residential fixed-rate mortgage has exceeded 6%. Although a 0.25% base rate increase from the Bank of England is expected on Thursday, an unexpected 0.5% rise could further destabilise the mortgage market.
A recent report warned that the current surge in mortgage costs is a more serious issue than those experienced in the 1980s and 1990s due to the larger proportion of earnings now committed to home loans and higher monthly payments as a percentage of post-tax income.
The same report noted that about 800,000 individuals looking to remortgage their homes in 2024 will face an average annual increase of £2,900 in their payments, with the average two-year fixed rate deal expected to reach 6.25% later this year. Another report estimated that one million homeowners whose fixed deals expire in the second half of this year could see their repayments rise by an average of £5,304 annually.
It’s predicted that annual repayments will be at least £15.7bn higher by 2026 than they were before the Bank of England’s rate increase cycle started in December 2021, exceeding the Bank’s early May projection of a £12bn increase.
Smith concluded: “How much of that £16bn is going to come from either reduced pension contributions or from savings that were intended for the medium to long term? With inflation negating wage rises and stealth income tax rises in operation, one fears quite a lot will.”
