Homeowners looking for new fixed-rate deals this year will see “a substantial reduction to their disposable income” due to the cost of living crisis, according to UK Finance’s latest Household Finance Review.

The banking body’s second quarter review says that on average the 1.3 million homeowners set to refinance this year will see a reduction of around 11% in their disposable income.

It adds: “This would leave the average consumer with around one quarter of their net income left over after refinancing.”

The report comes after the Bank of England lifted interest rates by 50 basis points to 1.75% last month, its biggest hike since 1995, which raised the base rate to a fresh 40-year high. It was the sixth rate rise since last December.

The move by the central bank comes as it battles rising inflation, which stood at 9.4% in June with the BoE forecasting will hit 13% by the end of the year.

The review says product transfer business fell away in the second quarter compared to strong levels seen in the first three months of the year, but external remortgage activity grew year on year, suggesting borrowers are shopping around more to find the best deals as interest rates rise rapidly.

It adds: “A shift towards increased external refinancing now may reflect increased borrower appetite to find the best deal available on the wider market as rates move upwards more rapidly than they have done in over a generation of mortgage borrowing.”

Overall, the report says that consumer spending remained stable in the second quarter and house purchase activity returned to pre-Covid-19 trends in the second quarter.

But it adds: “Confidence continued to fall, below the lows of both Brexit and the global financial crisis as cost-of-living pressures accelerated and households felt the squeeze.”

The review says total spending on credit and debit cards was up slightly in the second quarter at over £75bn from around £72bn in the first quarter, “due in part to higher prices driving up average spend, including more expensive petrol and food”.

Household savings built up through the pandemic largely remained stable but did not grow, “reflecting higher costs constraining people’s ability to save money”.

Overdraft levels rose gradually in the second quarter, at around £5.5bn, although total overdraft debt remains 5% below the levels seen prior to the pandemic.

UK Finance managing director of personal finance says: “Household spending was stable in the spring, with increased personal loan borrowing. We understand that some consumers are making larger purchases earlier than planned to stay ahead of inflation.

“As we head into the autumn, the pressure on household finances will increase and we anticipate a drop in consumer spending and house-buying activity.”