Rising mortgage rates are set to cost homeowners an extra £9bn this year and into 2024, according to the Centre for Economics and Business Research.
Last month’s higher-than-expected 8.7% inflation number for April sparked fears that the Bank of England will continue to raise rates, currently at 4.5%, which has caused lenders to pull and reprice hundreds of home loans, the thinktank outlines.
Markets are pricing in base rates that rise to 5.5% by the end of the year, and remain ‘higher for longer’ after core inflation –stripping out house prices — hit a 31-year high in April.
The research group adds that as the central bank is “now more likely to raise rates even higher than previously thought”, it expects the two-year 75% loan-to-value mortgage rate to hit an average of 5.1% in 2023 and 4.6% in 2024.
Mortgage holders looking to renegotiate their deals over the next two years “will face a hefty £8.7bn increase in their payments as a direct result of tighter monetary policy”, the body says.
Around 2.5 million mortgages are due to be renegotiated between 2023 and 2024, according to the Office for National Statistics estimates. An estimated 1 million homeowners are already exposed to higher rates due to their variable rate contracts.
London will see the largest rise in aggregate cost for refixers, with mortgage costs up by £1.8bn over 2023 and 2024, “a symptom of the £530,000 average price for a home in the capital compared to the UK average of £282,000,” the thinktank points out.
It adds refixers in the South East will see the next highest rise in payments, up £1.7bn in 2023.
“This is partly due to the higher-than-average house prices but also down to the fact that the region held the largest share of all mortgages in the UK in 2022, at 15%,” the group adds.
London and the South East also have the highest affordability concerns, when comparing house prices to gross annual earnings.
The latest ONS data show average house prices in London were 12 times higher than annual earnings, while this was 11 times higher in the South East.
The thinktank says Northern Ireland and the North East are expected to see the lowest increase in mortgage payments for those due to refix up to the end of 2024.
Refixers in Northern Ireland will see a £126m increase in mortgage costs, while in the North East, this increase will amount to £159m.
The body points out that its calculations assume 28% of refixers will renegotiate onto a two-year fixed-rate deal, while the rest will lock into five years, in line with recent data from the Bank of England, “which shows a marked increase in the appetite for five-year deals over the past six years”.
It adds: “Our estimates reveal a substantial strain on incomes across the UK that is yet to be fully felt. In other words, while the Bank’s tightening cycle might be nearing its end, the impact on households is only just beginning.
“With mortgages often occupying the most significant portion of household expenses, our estimates underscore the grim reality of rising rates, which will exert further strain on already stretched incomes, and hence the wider consumer economy, well into 2024.”
