As the term of their mortgage neared its end in September last year, Iona and her husband began the search for a new deal.
The couple, both architects in their mid-30s who asked to remain anonymous, saw their 1.6 per cent rate leap to 4.7 per cent on the best three-year fixed deal they could find, meaning that their payments will rise by £500 a month to about £1,700.
“All of our take-home from work goes to mortgage, childcare, groceries and bills — there is no extra at all”, Iona explained, adding that one day last month she woke up to find she had only £3 in her current account.
In the year leading up to Iona’s mortgage switch, record high levels of inflation sent the Bank of England on an extensive tightening campaign, putting an end to more than a decade of ultra-low borrowing costs. Fixed-rate mortgages, which reflect expectations of medium-term borrowing costs, followed suit.
Millions of middle-income households like Iona’s, whose earnings had kept them relatively immune to the cost of living crisis last year, could now see their incomes take a hit as they roll off old mortgage deals in 2023.
A report by Oxford Economics and financial services company Hargreaves Lansdown found that while almost 90 per cent of the UK’s lowest-income families had poor financial resilience when inflation hit record highs last year, many of those on middle incomes now find themselves squeezed as higher mortgage costs bite.
The most recent forecast by the National Institute for Economic and Social Research showed that middle-earning households will see their real incomes fall by around 6.2 per cent, or £1,077 per year, in 2023-24.
In its Autumn Statement last year, the government announced additional cash payments totalling up to £900 for families on lower incomes, in 2023-24. According to NIESR, this will help offset some inflationary pressures, resulting in a 2.3 per cent net income gain for the poorest households.
But wealthier households receive less help to defray rocketing prices. “Of course [low-income families] are still facing an incredibly difficult situation. Let’s not pretend it’s easy, but that cash help will make a difference to those poorest households [. . .] whereas middle-income earners don’t have the help but face all the costs,” said Adrian Pabst, economist at NIESR.
By mid-October 2022, the ill-fated “mini” Budget of then-chancellor Kwasi Kwarteng pushed the already ballooning mortgage rates beyond 6 per cent.
With some 1.4mn UK homeowners set to roll off their fixed-rate mortgages this year, according to analysis by the Institute for Fiscal Studies, many could see their monthly payments balloon.
The latest official inflation figures, released on Wednesday, showed that UK inflation remained unexpectedly high at 10.1 per cent, outstripping economists’ predictions and making it more likely that the BoE will increase interest rates next month.
The average two-year fixed rate mortgage deal at the start of 2021 was 2.57 per cent, according to price comparison site Moneyfacts. Two years later, the rate for families due to refinance shot up to 5.32 per cent.
A recent report by the BoE showed that housing costs will also surge for the 1.7mn homeowners on tracker mortgages, which mirror the bank’s soaring benchmark rate.
“Couple this with a cost of living crisis, high energy prices, along with inflation, and running the home could now become unaffordable for many, leaving no other option but to sell up and downsize,” said Iain Swatton, head of mortgages at Dashly.
For Iona’s family, this means that more often than not they resort to savings to cover monthly expenses, echoing projections by the Office for Budget Responsibility that UK household saving rates will drop to near zero in 2023 and 2024.
“We are both people who are handy with spreadsheets and have a relatively OK grip on our finances and are also earning a fine amount of money, and we are finding this whole thing messy and stressful,” Iona said.
The squeeze means that the number of mortgage holders at risk of default could surge by nearly 20 per cent during 2023, covering 425,000 extra households, according to Oxford Economics and Hargreaves Lansdown.
Rising costs are likely to have a disproportionate impact on single and self-employed people, as well as younger generations. Despite accounting for just 46 per cent of the market, the report shows that millennial and Gen Z mortgage holders will shoulder 61 per cent of the increase in housing costs.
That said, the latest data by the Financial Conduct Authority showed that in the final quarter of 2022, the proportion of mortgage holders in arrears was still near its lowest level since the regulatory body began recording in 2007.
“The rise in delinquencies is all yet to come,” said Innes McFee, an economist at Oxford Economics. “It can tend to be quite a lagging process.”
The numbers going into arrears might worsen during the year, warn experts, after people gradually roll off their existing deals and try to adjust to the new level of repayment.
Even with the challenges, “home ownership is still a major aspiration for most people”, said Ashley Osborne, chief executive and co-founder of MyPropTech.
“That means people are willing to make big sacrifices to get on the housing ladder and stay on it. Whether that is foregoing holidays and going out, living in otherwise less than ideal circumstances.”
For Iona, this has meant switching to cheaper childcare, accepting more extra work, and overhauling the family’s day-to-day spending habits. “We are trying to be much more savvy about ordering [groceries] online, and making sure that we are getting all of the lowest-cost odd veg that you can find,” she said.
“It’s sort of funny, because you are trying to mediate between really small-scale savings on single food items, and the massive ‘oh, it’s just going to be another £500 a month’, for reasons that seem very arbitrary”, she said.
Source: Economy - ft.com
