In a climate of sticky inflation and rising interest rates, the mortgage market faces escalating pressure with the UK’s total annual mortgage repayments predicted to increase by £15.8bn by 2026, as per research by the Resolution Foundation. This surge will equate to an average increase of £2,900 for households re-mortgaging in 2024.
Official data from April suggests inflation and pay growth are higher than anticipated, at 8.7% and 7.5%. This shift has prompted the market to foresee a prolonged rate-rising cycle initiated by the Bank of England in December 2021.
Interest rates are now expected to peak at nearly 6% by mid-2024, indicating a further five quarter-point rate hikes, marking the highest increase since the impact of ‘Trussonomics’ in Autumn last year. This peak is a substantial leap from the previously predicted 5% prior to the Bank’s May rate-setting meeting.
This upward trend is swiftly influencing mortgage rates, as several deals are withdrawn from the market and replaced with higher-rate alternatives. The average 2-year fixed-rate mortgage is predicted to hit 6.25% by the end of this year, not returning to below 4.5% until the end of 2027.
The Resolution Foundation highlights these trends as a significant intensification of the current mortgage crunch. Compared to the situation prior to the Bank’s rate tightening cycle in December 2021, annual repayments are predicted to be £15.7bn higher by 2026, escalating from a previously forecasted £12bn increase.
This mortgage crunch, delivering a record 3% increase in the cost of a typical mortgage relative to the typical household income this year, is expected to hit the living standards of millions of households leading up to the next general election.
However, the current mortgage shockwave is far less widespread than in previous instances, as per the Resolution Foundation. While almost 40% of households owned a home with a mortgage in 1989, that figure had fallen to below 30% last year, due to older people owning outright and fewer young people owning at all.
Despite these potentially positive shifts, about 7.5 million mortgagor households in Britain are still projected to see their repayments rise by 2026.
Simon Pittaway, senior sconomist at the Resolution Foundation, said: “This means the mortgage crunch is now on track to increase mortgage bills by £15.8bn, with those re-mortgaging next year set to see their costs rise by £2,900 on average.
“But with three-fifths of Britain’s mortgage hike still to be passed on to households, rising repayments will deal an ongoing living standards blow to millions of households in the run-in to the General Election.”
