The Bank of England could stop increasing interest rates soon, but the pain for homeowners is set to last much longer as only a third of inflation-linked mortgage cost increases have so far been passed on, according to a new report.
The bank has chosen to combat high inflation by raising interest rates twelve consecutive times since December 2021, with the most recent rise to 4.5 per cent happening last week.
According to a new report from think tank the Resolution Foundation, this will result in a £12billion total increase in annual mortgage costs by the end of this rate rising ‘cycle’.
However, the report says that only a third of that £12billion total rise has so far been passed on to homeowners in the form of higher monthly payments – meaning the worst could be yet to come.
Delayed effect: The popularity of fixed-rate mortgages means many homeowners have not felt the impact of Bank of England’s interest rate rises yet
Base rate has risen from 0.1 per cent to 4.5 per cent in 18 months – the sharpest increase since the late 1980s, and it has led to substantial increases in average mortgage rates.
However, the impact of rate rises on homeowners has been gradual, as the vast majority are on fixed-rate mortgages.
Announcing the latest interest rate rise last week, Bank of England boss Andrew Bailey said that almost 90 per cent of homeowners with a mortgage were now on a two or five-year fix.
This means their rate, and their monthly payments, cannot change until they come to the end of their fixed term, which is usually either two or five years.
The Resolution Foundation says that, of the 7.5 million mortgaged households that will eventually be affected by the rate rising cycle, around half have yet to see a change in their mortgage rate.
Fixed rates: Bailey said the proportion of fixed-rate mortgages had risen significantly
The average two-year fixed mortgage rate is now 5.26 per cent, with a five-year fix at 4.97 per cent, according to Moneyfacts.
This time last year those mortgage rates were 3.03 per cent and 3.17 per cent respectively.
And with interest rates expected to fall more slowly than they have risen, mortgage costs are set to remain high for some time – meaning homeowners will be paying more, for longer.
It is hard to accurately predict what will happen to mortgage rates over the next few years, but at the moment swap rates suggest they will remain above 4 per cent until the end of 2026.
Fixed rate mortgages have risen sharply since September 2022 but are now levelling off
Who will feel the mortgage rate pain most?
According to the Resolution Foundation’s analysis, total mortgage repayments are set to rise by £5.3billion between the start of 2023 and the end of 2024.
In this time around 1.6 million households are set to see their fixed-rate deals expire and will face an average increase in their annual mortgage bill of around £2,300.
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
Richer households, who are more likely to own a home with a mortgage, and tend to live in more expensive homes, will shoulder the majority of the £12billion rise in mortgage costs.
The report claims that three-quarters of the £12billion rise will be borne by the richest two-fifths of households.
However, less well-off households may end up taking a greater hit to their monthly incomes.
The Resolution Foundation said that repayments would increase by more than 4 per cent of income for mortgaged homeowners in the second lowest income quintile, compared to just 2 per cent for the highest-income households.
Younger home-owning families could also face a bigger living standards hit, as they tend to have lower incomes and bigger mortgages relative to the value of their homes.
Repayments for 18-34-year-old mortgagors are projected to increase by 3.4 per cent of income – nearly double the 1.8 per cent increase for those 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.
‘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.’
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