The Bank of England may stop raising interest rates soon, but the pain for homeowners will last much longer, as only a third of the inflation-related increase in mortgage costs has been passed on so far, according to a new report.
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The bank decided to fight high inflation by raising interest rates twelve times in a row since December 2021, with the latest increase to 4.5% coming last week.
According to a new report from the Resolution Foundation think tank, this will lead to an overall increase of £12bn in annual mortgage spending by the end of this rate hike ‘cycle’.
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However, the report says only a third of that £12bn total increase has so far been passed on to homeowners in higher monthly payments, meaning the worst could be yet to come.
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Long-term effect: The popularity of fixed-rate mortgages means that many homeowners have yet to feel the impact of the BoE’s rate hike.
The base rate rose from 0.1% to 4.5% in 18 months – the sharpest increase since the late 1980s – and this has led to a significant increase in average mortgage rates.
However, the impact of the rate increase on homeowners has been gradual, as the vast majority of them have fixed-rate mortgages.
When announcing the latest interest rate hike last week, Bank of England Governor Andrew Bailey said nearly 90% of homeowners with mortgages are now on a two- or five-year fix.
This means that their rate and their monthly payments cannot change until after their fixed term, which is usually two or five years.
The Resolution Foundation reports that of the 7.5 million mortgage households that will eventually be affected by the rate hike cycle, about half have yet to see their mortgage rate change.
How much will the rate increase cost you? Find out with our interest calculator
Fixed Rates: Bailey said the share of fixed rate mortgages has risen significantly
According to Moneyfacts, the average two-year fixed mortgage rate is now 5.26%, while the five-year mortgage rate is 4.97%.
This time last year, those mortgage rates were 3.03% and 3.17%, respectively.
And since interest rates are expected to fall more slowly than they have risen, the cost of mortgages will remain high for some time, meaning homeowners will pay more and for longer.
It’s hard to predict exactly what will happen to mortgage rates over the next few years, but for now, swap rates suggest they will stay above 4% until the end of 2026.
Fixed-rate mortgages have risen sharply since September 2022 but have now stabilized.
Who will feel the pain of the mortgage rate the most?
Total mortgage payments will rise by £5.3bn between early 2023 and end 2024, according to an analysis by the Resolution Foundation.
Around 1.6 million households will see their fixed-rate deals expire at this time and their annual mortgage bill will increase by an average of around £2,300.
People moving to new fixed rate deals over the next year can expect their annual mortgage costs to rise by an impressive £2,300.
Wealthier households, who are more likely to own a home with a mortgage and tend to live in more expensive homes, will bear most of the £12bn increase in mortgage spending.
The report claims that three-quarters of the £12bn increase will be borne by the richest two-fifths of households.
However, less affluent households may end up taking a bigger hit on their monthly income.
The Resolution Foundation said payments would increase by more than 4% of mortgaged homeowners’ income in the second lowest income quintile, compared to just 2% for the highest income households.
Younger homeowner families may also face a bigger hit to living standards as they tend to have lower incomes and larger mortgages compared to the value of their homes.
Payments to pledgees aged 18 to 34 are projected to increase by 3.4% of income, almost double the 1.8% increase for those aged 55 and over.
Simon Pittaway, Senior Economist at the Resolution Foundation, said: “Last Thursday, the Bank of England raised interest rates for the twelfth consecutive time, but also indicated that the sharpest rate hike cycle since the 1980s was nearly over.
“But while the rise in interest rates may be coming to an end, there are still many mortgage problems ahead.
“People moving to new fixed rate deals next year can expect their annual mortgage costs to rise by an impressive £2,300 – with young families and low- and middle-income households with mortgages facing the biggest blows to the standard of living. .’
