1.4m UK mortgage holders face 20% hit to disposable income from rate hikes

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More than 1 million households across Britain are expected to lose at least 20% of their disposable incomes thanks to the surge in mortgage costs expected before the next election, the UK’s leading economics thinktank has warned.

Sounding the alarm as mortgage costs reach the highest levels since the 2008 financial crisis, the Institute for Fiscal Studies (IFS) said that almost 1.4m mortgage holders would see at least a fifth of their disposable income erased.

It said the heaviest blow would be reserved for those under the age of 40 with larger mortgages, with the biggest financial hit for households in London and the south-east of England, where property prices are typically higher than the national average.

The biggest rise is for those in their 30s, for whom payments will jump by ?360 a month, or 11% of disposable income.

The prospect comes as the government faces growing pressure to intervene amid what some MPs have termed a “mortgage timebomb” waiting to explode for millions of households as they reach the end of fixed-rate deals on their home loans. More than a quarter of mortgage holders are expected to reach the end of cheaper deals before the next election, which must be held by 28 January 2025.

Households are facing a sharp rise in costs as high street banks drive up new home loan costs above 6%, the highest levels since Liz Truss’s disastrous mini-budget last autumn.

It comes as the Bank of England is expected to raise interest rates for a 13th consecutive time on Thursday in response to stubbornly high inflation which has left the UK with the highest rate in the G7. Figures on Wednesday showed inflation unexpectedly remained unchanged at 8.7% in May, adding to pressure on the Bank for further increases.

According to the analysis by the IFS, more than 14 million adults over the age of 20 have a mortgage. Many have fixed-rate mortgages and so in the short-term are shielded from rate rises. But eventually those fixed terms will come to an end, leaving households exposed to soaring costs.

In March 2022, households with a mortgage were spending an average of ?670 a month on payments. On average, individuals in mortgage-holding households will pay almost ?280 on top of this amount each month, with those in their 30s paying almost ?360 more.

Adults over the age of 60, typically with smaller mortgages – often having bought their homes when property prices were lower, or after years of repaying their loans – would face the smallest hit, at just over ?150 a month.

The IFS said households in London and the south-east of England would see the biggest increases: more than ?500 on average, which is worth about 12% of disposable income. The impact would be least in Northern Ireland, where average monthly payments are expected to rise by just over ?150, or less than 6% of disposable income.

Thomas Wernham, a research Economist at IFS, said: “Many families bought homes – often with sizeable mortgages – when interest rates were very low. 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.

“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.”