Polls suggest the cost of living is still voters’ main priority. A BMG Research survey for ‘The i Paper’ in August found three quarters of people name it as one of their top political issues, with 28% putting it at number one – more than any other topic.
Meanwhile, the International Monetary Fund (IMF) is predicting that UK inflation will remain higher than any other large rich country, this year and next – UK inflation sits at 3.8%, close to double the Bank’s 2% target. Inflation is at its worst on some of the most essential goods and services, such as energy, water and food. Consumers’ inflation expectations have started to rise which will have unsettled policymakers.
Meanwhile, the rate of unemployment has risen to a four-year high. The headline rate of unemployment rose again to 4.8% in September. The number of vacancies has fallen for the 39th consecutive month, too. They have now fallen to a four-year low, hitting rates last seen during the Covid lockdown.
Private sector pay growth has slowed to its lowest rate in nearly four years. And the number of long-term sick has started rising again, meaning there are fewer jobs, the pay is lower, and every month more and more people are either officially unemployed or have left the market and started claiming benefits instead.
The trend is clear. Unless Rachel Reeves changes course, it is going to get far worse. The Government pushed up National Insurance (NI), effectively a tax on jobs – and can hardly be surprised that we now have fewer of them. It increased the Living Wage, making it more expensive to employ people. Let’s not forget that the decline in employment is happening at a time when the rest of the global economy is fundamentally healthy, and when the financial markets are buoyant. When a downturn arrives, as it surely will over the next couple of years, unemployment will soar.
Raising taxes by billions of pounds at the Budget will obviously make the cost of living worse rather than better, at least in the short term. The Chancellor says she has heard the message. NI increase could be suspended. The Government could pledge to freeze the Living Wage for three years. It could postpone the workers’ rights Bill.
All the while, mortgage rates are starting to rise as lenders react to higher funding costs. While average rates for 2- and 5-year fixes rising by 0.2% month-on-month (Moneyfacts) is not a seismic change, around the margins it will still make a difference to borrowers’ monthly mortgage costs. As David Stirling, an IFA at Mint Wealth, said: “The upward move in fixed rates may be modest, but it does mark a shift in sentiment and is a reminder that fiscal storm clouds are gathering.”
Lenders need to take note. While arrears may appear under control for the moment, the broader picture suggests growing financial pressure on households.
Slower wage growth and rising unemployment could impact borrowers’ ability to meet repayments, especially in the context of high living costs and elevated interest rates. Servicers should prepare for a potential uptick in arrears and customer vulnerability. Proactive engagement and tailored support strategies will be essential. Lenders may also need to rethink affordability models and explore flexible products that reflect changing income dynamics. Now more than ever, leveraging real-time data to understand borrower behaviour and anticipate risk will be a competitive advantage. As the economic landscape shifts, lenders and servicers have an opportunity to lead with empathy, agility, and insight. Lenders should invest accordingly.
Amy Morgan is senior leader – marketing at Target Group
