Mortgage crunch deepens with £15.8 billion repayments rise now on track to bite by 2026

Signs that inflation is proving stickier than expected have raised market expectations for how high the Bank of England will raise interest rates, with total annual mortgage repayments now on course to rise by £15.8 billion by 2026, and by £2,900 for the average household re-mortgaging next year, according to new research published today (Saturday) by the Resolution Foundation.

Official data published in the last month – notably higher than expected inflation and pay growth in April (8.7 and 7.5 per cent respectively) – has raised market expectations that the Bank’s rate-rising cycle, which began in December 2021, will continue for longer.

Rates are now expected to peak, in mid-2024, at nearly 6 per cent – suggesting another five quarter-point rate hikes are on the way – the highest since the fallout from ‘Trussonomics’ last Autumn. That is up from just under 5 per cent before the Bank’s May rate-setting meeting.

Those higher expectations are swiftly moving through into mortgage rates, with hundreds of deals being withdrawn from the market and replaced by new higher rate deals. The average two-year fixed-rate mortgage is now expected to hit 6.25 per cent later this year, and to not fall back below 4.5 per cent until the end of 2027.

This would significantly increase the scale of the mortgage crunch currently unfolding, says the Foundation. Annual repayments are now on track to be £15.8 billion a year higher by 2026 compared with prior to the Bank’s rate tightening cycle starting in December 2021 – up from a projected £12 billion increase at the time of the most recent Monetary Policy Report in early May. Annual repayments for those re-mortgaging next year are set to rise by £2,900 on average – up from £2,000.

 It is also unprecedented, with this year’s rate rises set to increase the cost of a typical mortgage by 3 per cent of typical household income this year – even bigger than 2.4 per cent increase in 1989.

The bad news for the government is that three-fifths of the £15.7 billion increase in annual mortgage repayments are still to be passed on to households, as they continue to move onto new – higher – fixed rate deals up to 2026.  This will deliver a rolling living standards hit to millions of households in the run-in to the next general election.

The better news for the government however, is that the current mortgage crunch is far less widespread than previous shocks. Back in 1989, almost 40 per cent of households owned a home with a mortgage, and were therefore exposed to rising costs.

By last year, the combination of more older people owning outright, and fewer young people owning at all, meant that the share of households with a mortgage had fallen below 30 per cent. Overall, around 7.5 million mortgagor households in Britain are expected to see their repayments rise by 2026.

 Simon Pittaway, Senior Economist at the Resolution Foundation, said:

“Market expectations that interest rates are going to rise even higher, and stay higher for longer, are having a major effect on the mortgage market, with deals being pulled and replaced with new higher-rate mortgages.

“This means the mortgage crunch is now on track to increase mortgage bills by £15.8 billion, with those re-mortgaging next year set to see their costs rise by £2,900 on average.

“Of course, market expectations can be wrong, and rate rises may not turn out to be as bad as feared. But with three-fifths of Britain’s £15.7 billion mortgage hike still to be passed on to households, rising repayments will deal an ongoing living standards blow to millions of households in the run-in to the General Election.”