Mortgage rise impact ‘will dwarf energy bills crisis’ for UK homeowners

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The growing mortgage timebomb facing millions of households will “dwarf the energy bill crisis” for many middle earners, ministers are being warned, amid new evidence that Labour is amassing a huge lead among mortgage payers.

The spiralling costs of energy dominated the concerns of ministers last autumn, before they were forced to intervene as annual costs soared. However, analysis seen by the Observer shows that some households will face paying more than ?5,000 a year extra on their mortgages as a result of rising rates – far in excess of the extra energy costs they faced.

One Tory MP called on the government to look at “politically unpalatable” options to help spread the pain of tackling inflation away from mortgage holders, such as slashing state-backed support for the wealthy.

In a sign of the pressure that Rishi Sunak and chancellor Jeremy Hunt are already under, the latest Opinium poll for the Observer suggests Labour now has a 31-point lead among mortgage holders, up from a 19-point lead in April. Labour’s support among the group has increased from 44% to 53%.

With more than 2.4m fixed-rate homeowner mortgage deals due to expire by the end of 2024 and average two-year deals now above 6%, many could see their interest rate triple over the coming months. Interest rates are now at the highest level since the 2008 financial crisis after the Bank of England’s shock decision to raise raised them to 5% last week.

Analysis for the Observer by the Public First consultancy found that the impact of mortgage rises could be far in excess of the surge in energy bills for certain households. Those with typical-size mortgages in London and the home counties could easily see their mortgage rise by ?5,000 or more per year compared to 2020-21, when many will have last fixed their mortgage rate.

Those under the age of 45 face the greatest rises given that their interest payments are a higher proportion of their mortgage. Should their mortgage rate triple, annual costs for typical mortgage holders in these age groups could rise by more than ?4,000.

Rachel Wolf, a founding partner of Public First who co-authored the 2019 Tory manifesto, said: “The consequence of ever-rising house prices, particularly for squeezed millennials and those in the ever more expensive south-east, will be devastatingly clear in the next year. With the end of low interest rates, the parts of middle Britain that aren’t yet retired will suffer in a way that for them will dwarf the energy bill crisis.”

There is now despair and frustration among Tory MPs over the crisis. Hunt has already met major mortgage lenders, who have agreed to give homeowners a 12-month grace period before repossession proceedings begin. However, MPs are braced for growing discontent, and some believe the government has been late to understand the severity of the situation.

Lucy Allan, the Telford MP who is standing down at the next election and was one of the first to raise the alarm over mortgages, said she worried the government had held a misconception that mortgage holders were “the comfortable middle classes”.

“While it is true some mortgage holders have substantial equity in their homes, and savings to fall back on, many are young families who recently entered the housing market at what were then very low rates of interest,” she said. “If too few people have a mortgage, and those who do have already cut their discretionary spend, constantly cranking up interest rates will not bring down inflation. It will simply ruin a small group of people and collapse the property market.

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“Government has more room for manoeuvre and needs to be creative. To bring down inflation we need to share the pain across society, however politically unpalatable that is, rather than confine it to just one small group.

“Why, for example, should someone earning ?100,000 receive free childcare? Why should someone with a generous public-sector pension also have their state pension raised in line with inflation? Why should the wealthiest in society be eligible for the energy support scheme? Financial support schemes for affluent people fuel inflation. Government will have to apply the brakes as well.”

The Lib Dems are already analysing how they can take advantage of mortgage increases in so-called blue wall seats held by the Tories largely in the home countries. It has already identified 29 seats in the blue wall where the number of households with a mortgage outweighs the current majority of the sitting Conservative MP. The most vulnerable seat is Carshalton and Wallington, where it would require just 4% of households with a mortgage to switch their vote for the Conservatives to lose. This is followed by Wimbledon, Cheltenham and Winchester.

Overall in the latest Opinium poll, Labour has made significant gains. Its lead rose from 12 points to 18 over the Tories in the last two weeks. Keir Starmer leads Sunak on who voters see as the best prime minister by 30% to 22%.