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Base rate rises to end but ‘more mortgage pain to come’

Emma Lunn
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Emma Lunn

The Resolution Foundation has warned that even though the Bank of England is nearing the end of its rate-rising cycle, the majority of the impact on borrowers is still to come.

The think tank says the Bank of England looks set to have almost finished the “sharpest interest rate tightening cycle since the 1980s”. The latest rise was this week, bringing the base rate to 4.5%, the highest rate since the financial crisis.

But the Foundation warns that the switch from variable to longer fixed rate mortgages has delayed the impact on households. It says two-thirds of the eventual £12bn increase in annual mortgage costs is still to be passed on.

Increase in fixed rates

The growing popularity of fixed rate mortgage deals – which have gone from accounting for just £4 of every £10 lent pre-financial crisis, to more than £9 of every £10 lent last year – means that the majority of the impact on mortgage borrowers still to come. These households will see their mortgage costs rise when their fixed rate expires and they look for a new deal.

The Resolution Foundation said the issue had been compounded by the growing popularity of longer-term deals, with five-year fixes overtaking two-year fixes to become the most popular type of mortgage between 2016 and 2022.

As a result, of the 7.5 million mortgagor households that will eventually be affected by the rate rising cycle since the end of 2021, around half have yet to see a change in their mortgage rate.

Mortgage costs ‘to remain high’

With interest rates expected to fall more slowly than they have risen, mortgage costs are set to remain elevated for some time. Market prices suggest the average rate on new mortgages will remain above 4% until the end of 2026. As a result, households have so far faced just a third of the eventual £12bn a year rise in mortgage costs that the current rate-rising cycle will bring.

The Resolution Foundation said this year will be a particularly bruising one for many homeowners. Between Q1 2023 and Q4 2024, total repayments are set to rise by £5.3bn, as about 1.6 million households see their fixed rate deals expire and face an average increase in their annual mortgage bill of about £2,300.

‘Living standards shock’

Richer households, who are more likely to own a home with a mortgage than poorer households, and tend to live in more expensive homes, will face the majority of the £12bn rise in mortgage costs.

However, the scale of the living standards shock will be greatest for those low and middle-income households who are affected.

The Foundation predicted that repayments will increase by more than 4% of income for mortgagors in the second lowest income quintile, compared to just 2% for the highest income households.

Younger homeowners, who tend to have lower incomes than older households and higher mortgages relative to those incomes, will also face a bigger living standards hit. Repayments for 18 to 34-year-old mortgagors are projected to increase by 3.4% of income – nearly double the 1.8% increase for mortgagors aged 55 and above.

Simon Pittaway, senior economist at the Resolution Foundation, said: “Last Thursday, the Bank of England raised interest rates for the twelfth time in a row, but also indicated that the sharpest rate-rising cycle since the 1980s is nearly at an end.

“But while 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.”