Homeowners’ disposable income will decrease by 20%.
According to a think tank, rising interest rates could cause 1.4 million homeowners to lose more than 20% of their disposable income.
Of those expected to be severely hurt, 690,000 will be under 40, according to the Institute for Fiscal Studies (IFS).
High borrowing prices, according to the organisation, “are undoubtedly going to put many families in a serious bind.”
In an effort to combat inflation, the Bank of England, which controls interest rates, is predicted to increase them once more.
Data released on Wednesday confirmed expectations that the Bank of England will increase interest rates by 0.25% to 4.75% on Thursday. Inflation was stable at 8.7% in the year to May, according to the data.
The price of anything rising over time is known as inflation.
Rising interest rates are essentially unavoidable, according to the IFS, a politically unaffiliated research tank with a concentration on economics, given that inflation is at “levels not seen in decades.”
According to its experts, a number of banks recently raised mortgage rates once more in anticipation of the Bank raising its base rate even more.
Accordingly, if mortgage rates stayed at roughly 6%, homeowners would pay nearly £280 more each month on average than they would have in March 2022. It stated that adults between the ages of 30 and 39 would normally pay an additional £360.
According to the IFS, 60% of people with mortgages, or 8.5 million adults, will spend more than a fifth of their income on mortgage payments.
“This is a significant rise. Only 36% of mortgage holders were in this situation in March 2022. It also increased from 2007-2008,” it continued.
Though a third of adults aged 20 and older have mortgages, the think tank said that many of these people are on fixed-rate contracts, shielding them from rate increases. However, almost a quarter of these contracts are set to expire by the end of this year, leaving people exposed to greater costs.
According to the IFS, “for some the rise will be far larger: approximately 1.4 million – of whom 690,000 are under 40 – would see their disposable earnings decline by over 20%.
Since December 2021, the Bank of England has increased interest rates in an effort to slow the rate at which prices are rising. The Bank’s base rate, which is used by lenders to determine interest rates for savings accounts as well as loans, credit cards, and mortgages, is currently 4.5 percent.
According to theory, increasing interest rates makes borrowing more expensive and decreases people’s disposable income, which leads to consumers making fewer purchases and a slowdown in price increases.
However, the rate of inflation has not been declining as quickly as anticipated, and there have been calls for the Bank to increase interest rates.
Lenders have begun withdrawing transactions and quickly raising rates in recent weeks in anticipation of another interest rate hike.
The typical rate for a two-year fixed agreement increased to 6.15% on Wednesday. It was 2.65% in March 2022.
The Joseph Rowntree Foundation (JRF), a group that advocates for low-income people, said that its research revealed that nearly three-quarters of low-income households with mortgages reported going without showers or having “food insecurity” in the previous month.
JRF Chief Economist Alfie Stirling stated that there was a “strong case” for the Bank to “take a pause for breath” and defer rate increases until the effects of earlier hikes had been felt completely.
Increasing interest rates, according to the economist, “won’t stop the UK from getting poorer; they merely reflect a choice over how and where the economic pain is felt; taking some of the hit away from faster price increases, towards those with debts, and ultimately hitting pay growth and job creation for us all.”
It is a balancing act that, if done incorrectly, runs the risk of turning a medium-term price shock into an excruciating new norm for those who can least afford it.
As a result of concerns that it would “make inflation worse, not better,” Chancellor Jeremy Hunt has ruled out the government providing significant financial assistance to mortgage holders.
But he promised that he will meet with lenders later to find out what assistance they could offer to needy families.
Ewan Cameron purchased a London flat two years ago, and only recently was able to acquire a new fixed agreement after having two mortgage offers rejected.
He now needs to find an additional £400 per month to pay for his house and is thinking of renting out the extra room to do so.
We both made jokes about who would wind up on the better end of the spectrum in a few years, but I’m the one paying the price, he added. “I recall speaking to a guy who bought at around the same time and he locked into a five year mortgage.
The IFS stated that, in comparison to what is available to low-income renters, the UK’s benefits system currently offers “relatively little support for low income mortgagors.”
Because of this, it was stated, “those who are particularly likely to struggle with rate rises do not have much of a safety net.”
The think tank said that increasing borrowing prices affected different age groups differently depending on where they resided.
According to the report, typical raises, for instance, varied from just over £150 in Northern Ireland to £390 per month in the South East and £520 in London.
It was noted that renters have experienced “very large increases” in recent months, demonstrating that pressure was not only being felt by homeowners.
The IFS stated that “it is likely that at least some of the rent increases we are seeing are due to the impact of high interest rates hitting landlords’ borrowing costs.”
According to data provided to the BBC, rent now typically consumes 28.3% of household income, up from 27% during the previous ten years. People’s money can nevertheless be significantly impacted by a slight percentage increase.