Borrowers could lose a fifth of disposable income to interest rate rises
Mortgage holders could see their disposable income reduced by up to 20% because of higher interest rates, an economics research firm has said.
A report by the Institute for Fiscal Studies (IFS) said lenders were putting rates up in anticipation of the Bank of England increasing the base rate, particularly as inflation remains elevated.
It said the average two-year fix was 2.65% in March 2022, but now this had risen to 6.01%.
In March, households were spending £670 a month on average on mortgage payments, with £230 covering the interest. If rates remain at their current level, the same households could pay an additional £280 towards their mortgage each month.
IFS said this increase would have differing impacts on households, with those aged between 30 and 39 facing a £360 jump in their monthly bill.
The average household would see their disposable income drop by 8.3%, but for 30 to 39 year olds this rises to nearly 11%. Mortgage holders between the ages of 20 and 29 could also face a nearly 11% decrease in their disposable income.
The region in which homeowners live could also impact how they are affected by rate rises. IFS said mortgagors in Northern Ireland could see rises of more than £150 a month, while for people in the South East, this could result in a £390 increase. For mortgage holders in London, this could lead to payment increases of £520 a month.
Disposable income could be reduced by around 6% or 7% in the North of England, Midlands, Scotland and Wales, but reach 9.4 per cent in the South East and 12 per cent in London.
IFS suggested that overall, 60% of mortgage holders could be spending more than a fifth of their income on monthly payments due to the rise in interest rates.
By comparison, the firm said just 36% of mortgagors were in this position in March last year.
The IFS report said: “Given that inflation has risen to levels not seen in decades, rising interest rates are essentially inevitable. But it is unquestionably going to cause serious difficulty for many families
“Notably, the UK benefit system provides relatively little support for low income mortgagors compared to what’s on offer for low income renters, meaning that there is not much of a safety net for those who are particularly likely to struggle with rate rises.”