Huge jump in mortgage costs facing 1.4 million Britons, IFS says

AROUND 1.4 million Britons could lose a fifth of their disposable income if mortgage rates stay at current levels, according to the Institute for Fiscal Studies (IFS).

On average, mortgage holders in the UK will pay an extra £280 (S$481) a month, the researcher said in an analysis published last Wednesday (Jun 21). For around one in 10, however, the jump will be around £360, hitting many people under the age of 40.

“As people’s fixed term offers come to an end they are going to be exposed to much higher interest rates. For many, the increase in monthly repayments is going to come as a serious shock,” said Tom Wernham, research economist at IFS. “Given the cost-of-living pressures people are already facing due to high food and energy price inflation, these significant increases in mortgage costs could not come at a worse time.”

The findings will ramp up pressure on Prime Minister Rishi Sunak, who faces a general election by January 2025 at the latest. A key mortgage rate topped 6 per cent last week, threatening to plunge the economy into recession as squeezed homeowners are forced to cut back on spending. 

Mortgage costs are being driven higher by bets the Bank of England will have to keep raising interest rates to get a grip on inflation. With figures last Wednesday showing inflation failed to slow as expected in May, investors are putting a 50 per cent chance on a half-point increase on Thursday.

Rising mortgage costs will hit hardest in London, costing around 12 per cent of disposable income on average, the IFS said. 

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Around 60 per cent of mortgage holders are set to spend over 20 per cent of their income on home-loan payments. That’s up from 36 per cent in March 2022, when the average two-year fixed rate was 2.65 per cent.