Resolution Foundation predicts 800,000 homeowners to face a £2,900 annual increase in mortgages

Resolution Foundation: Rising Interest Rates to Increase Annual Mortgage Costs by £2,900 for 800,000 Homeowners in 2024

According to the Resolution Foundation, the anticipated rise in interest rates will result in homeowners seeking to remortgage, paying an average of £2,900 more per year starting in 2024. The think tank warns of a looming “mortgage crunch” as the average two-year fixed-rate deal is expected to reach 6.25% later this year.

Approximately 800,000 individuals are projected to remortgage next year, exacerbating the situation. In recent weeks, lenders have already raised rates, leading borrowers to face substantial increases. The Bank of England is also anticipated to raise interest rates further in the coming week.

Chancellor Jeremy Hunt stated that the Bank has no choice but to raise rates to address inflation and control escalating prices. The Bank’s current base rate is 4.5%, but the Resolution Foundation predicts it will peak at nearly 6% by mid-2024.

These expectations have quickly impacted the mortgage market, with deals being withdrawn or replaced with higher-rate alternatives. Moneyfacts, a financial data firm, reported that homeowners’ average two-year fixed-rate loan currently stands at 5.98%, compared to 3.14% a year ago.

The Resolution Foundation warns that the average two-year deal will unlikely fall below 4.5% until the end of 2027, significantly intensifying the ongoing mortgage crunch. Overall, annual repayments are projected to increase by £15.8 billion by 2026 compared to pre-rate-raising cycle levels in December 2021.

‘Living standards hit.”

Think tank warns of “rolling living standards hit” as household mortgage costs increase ahead of the next general election. Approximately three-fifths of the expected increase in annual mortgage payments have yet to be passed on to borrowers as they transition from existing fixed-rate deals to new ones. This situation will impact millions of households in the lead-up to the election.

In December of the previous year, the Bank of England predicted that around four million UK households would face higher mortgage payments in 2023, with the average monthly bill increasing by £250. However, this estimate included households with a tracker and variable-rate mortgages and was based on a lower base rate then.

Comparing the current scenario with the interest rate peak of nearly 15% in 1989, the Resolution Foundation anticipates that this year’s rate hikes will result in a mortgage cost increase of 3% of a typical household income, surpassing the 2.4% rise observed back then.

However, the think tank notes that the current mortgage crunch is less widespread than in previous shocks, considered “better news for the government.” In 1989, almost 40% of households with mortgages were exposed to rising costs. In contrast, with more older individuals owning their homes outright and fewer young people owning property, the proportion of households with mortgages has fallen below 30%.

Simon Pittaway from the Resolution Foundation acknowledges that market expectations of further and sustained interest rate increase significantly impact the mortgage market. He also emphasizes that market expectations can be inaccurate, and rate rises may not be as severe as feared.

The think tank estimates that approximately 7.5 million people with mortgages will experience repayment increases by 2026.