Rising mortgage rates are poised to inflict an additional £9 billion blow on homeowners throughout this year and into 2024, warns the Centre for Economics and Business Research.
Last month’s unexpected surge in inflation, reaching 8.7% in April, has ignited concerns that the Bank of England will persist in raising rates, currently standing at 4.5%. Consequently, lenders have withdrawn and repriced numerous home loans, as outlined by the thinktank.
Market projections indicate that base rates will soar to 5.5% by year-end and remain at persistently elevated levels. This anticipation stems from the fact that core inflation, excluding house prices, reached a three-decade high in April.
The research group further highlights that, given the central bank’s increased likelihood of surpassing prior expectations and raising rates even higher, they expect the average two-year mortgage rate at a 75% loan-to-value ratio to reach 5.1% in 2023 and 4.6% in 2024.
As a direct consequence of the tighter monetary policy, individuals seeking to renegotiate their mortgage agreements over the next two years will confront a substantial increase of £8.7 billion in their payments, according to the thinktank’s analysis.
Estimates from the Office for National Statistics indicate that approximately 2.5 million mortgages are due for renegotiation between 2023 and 2024. Notably, an estimated 1 million homeowners are already exposed to higher rates due to their variable rate contracts.
London is expected to witness the most substantial surge in refixing costs, with mortgage expenses skyrocketing by £1.8 billion throughout 2023 and 2024. The thinktank highlights that this surge reflects the average price of £530,000 for a home in the capital, compared to the UK average of £282,000.
Following closely, refixers in the South East will experience the second-highest rise in payments, amounting to £1.7 billion in 2023. The research group attributes this increase not only to above-average house prices but also to the fact that the region accounted for the largest share of mortgages in the UK in 2022, standing at 15%.
When comparing house prices to gross annual earnings, London and the South East also exhibit the greatest affordability concerns. According to the latest data from the ONS, average house prices in London were 12 times higher than annual earnings, while the ratio stood at 11 times higher in the South East.
In contrast, the thinktank predicts that Northern Ireland and the North East will witness the smallest surge in mortgage payments among those due for refixing by the end of 2024. In Northern Ireland, mortgage costs will increase by £126 million, while the North East will face a £159 million rise.
The thinktank’s calculations assume that 28% of refixers will opt for a two-year fixed-rate deal, while the remaining majority will opt for a five-year term, in line with recent data from the Bank of England, which reveals an increased preference for five-year deals over the past six years.
The thinktank concludes, “Our estimates reveal a significant strain on incomes across the UK that has yet to be fully felt. In other words, while the Bank’s tightening cycle may be nearing its end, the impact on households is only just beginning. With mortgages often constituting the largest portion of household expenses, our estimates underscore the grim reality of rising rates, which will further burden already stretched incomes and consequently impact the broader consumer economy well into 2024.”