UK households that come to the end of fixed-rate mortgage deals next year face an average £2,900 increase in annual payments, putting Rishi Sunak under pressure to defuse an election-year time bomb.
The estimated increase in payments by the Resolution Foundation think-tank reflects concern that the UK has a worse inflation problem than other countries and that the Bank of England will need to raise interest rates to almost 6 per cent next year, when a general election is expected.
Liberal Democrat leader Sir Ed Davey on Friday called for a targeted £3bn “mortgage protection fund” for people whose homes would otherwise be repossessed, in a sign of growing political heat on the issue.
But the prime minister and his chancellor Jeremy Hunt argue that such a move would be dangerous because it would fuel inflation.
Sunak said on Wednesday that the government’s “number one economic priority” was taming high inflation.
The political row comes after another week of mortgage rate increases by lenders, including NatWest, Nationwide and HSBC, in moves that followed poor official inflation data last month that prompted financial markets to increase their expectations of interest rate rises by the BoE.
“It is serious,” said one senior government figure. “That’s why we are fully focused on halving inflation by the end of the year. Inflation is the disease in the economy.”
The BoE is likely to raise interest rates from 4.5 per cent to 4.75 per cent when the Monetary Policy Committee meets on Thursday, although some economists think a larger increase is possible if there is another bad set of inflation figures on Wednesday.
BoE governor Andrew Bailey said on Tuesday that inflation was “taking a lot longer” than hoped to come down, and a central bank survey found that public confidence in its ability to control inflation had fallen to its lowest level since records began.
In a report, the Resolution Foundation estimated that 1.6mn fixed-rate mortgages are due to expire in 2024.
Simon Pittaway, author of the think-tank’s report, said households remortgaging in 2024 faced the largest increase in annual payments, because it was likely to be the year of peak interest rates, and most borrowers would have previously enjoyed cheap deals.
Although the average annual increase in payments next year is estimated to be £2,900, younger families with larger debts could experience significantly greater rises.
The Resolution Foundation estimated that the average rate on a two-year fixed mortgage will increase to 6.25 per cent this year, and will not fall under 4.5 per cent until the end of 2027.
“The latest moves in market interest rates suggest that a dire outlook for UK mortgagors just got worse,” Pittaway said.
“If rates move in line with expectations, UK families are set to face a prolonged and historic mortgage crunch.”
Once almost all mortgage borrowers move on to more expensive mortgage products, the Resolution Foundation estimated that they would collectively be paying £15.8bn more each year to service their debts than in 2021, when the BoE started to raise interest rates in response to inflation.
Labour has claimed that homeowners are paying a “Tory mortgage premium”. Liam Byrne, former Labour Treasury minister, said: “The single most decisive piece of literature that comes through a voter’s letterbox between now and the election will be their mortgage statement.”
