Eyewatering damage to 1.4 million mortgage customers many being young.
Younger homeowners, according to the Institute for Fiscal Studies, will suffer the most if mortgage payments continue to climb amid rising concerns that the Bank of England may need to take tougher action against inflation.
According to a reputable think tank, an estimated 1.4 million homeowners with mortgages, half of whom are under 40, might lose more than 20% of their disposable income as interest rates rise.
According to the Institute for Fiscal Studies (IFS), the possibility that 8.5 million people will have to spend a fifth of their income on mortgage payments is “eyewatering” and would be a “serious shock” to the market.
As the Bank of England is ready to boost the base rate once more to combat inflation in the UK economy, it has issued the warning.
Prior to the publication of the most recent inflation statistics on Wednesday, it was widely anticipated that the monetary policy committee will decide to choose a 0.25 percentage point increase, its 13th straight increase, to 4.75% on Thursday.
However, because it arrived hotter than anticipated, financial market participants are now divided on whether the hike will be more pronounced, raising the Bank rate to 5%.
Expectations have increased over the past month that the Bank will have to maintain its rate rises for longer than anticipated, maybe as high as 6%, as a result of the inflation figures and an increase in basic pay.
Because of this, funding costs have increased over the past several weeks, causing mortgage lenders to raise the price of their home loan packages.
The Resolution Foundation issued a warning over the weekend, stating that average yearly mortgage repayments were expected to increase by £2,900 for those renewing next year.
The average two-year fixed rate mortgage has increased from 2.65% to more than 6% since March 2022.
According to the IFS research, those in their 30s would suffer the most if rates continued to be that high, at levels not seen in nearly 15 years.
It predicted that over 1.4 million homeowners with mortgages—half of them are under 40—would see an increase in their payments of at least 20% of their disposable income.
According to the analysis, because loan values are higher in relation to earnings than income, people in London and southern England will experience the greatest percentage drops in their disposable incomes.
According to the report, “after this increase, about 60% of the 14 million people with mortgages (i.e., 8.5 million adults) will spend at least a fifth of their income on mortgage payments.”
“This is a significant rise. Only 5.1 million people (36% of those with mortgages) paid at least this much of their incomes in March 2022.
Calls for government assistance due to rising mortgage payments have been rejected by Chancellor Jeremy Hunt because of concern that such assistance will just fuel inflation by putting more money in people’s pockets.
On Tuesday, he informed the House of Representatives that he will meet with major mortgage lenders later this week to discuss how they may assist struggling consumers.
“Many families bought homes – frequently with sizeable mortgages – when interest rates were very low,” said IFS research economist Tom Wernham. People will be exposed to substantially higher interest rates as their fixed-term offers expire.
“For many people, the increase in monthly payments will be a major shock because, on average, it will result in an 8.3% decrease in their discretionary income. Additionally, mortgage payments are expected to increase by an alarming 20% of disposable income or more for 1.4 million homeowners, half of whom are under 40.
These huge increases in mortgage expenses “could not come at a worse time, given the cost of living pressures people are already facing due to high food and energy price inflation.”