Mortgages to rise by £2,900 a year on average for 800,000, Resolution Foundation says

The Resolution Foundation predicts the average two-year fixed rate deal will hit 6.25% later this year, leaving the UK in a “mortgage crisis”.

About 800,000 people are expected to take out a new mortgage next year, the group said.

A Treasury spokesman said there was “personalised support” for homeowners struggling to make their payments.

Borrowers are already facing big increases after lenders raised rates in the past two weeks.

The Bank of England is expected to raise interest rates again next week.

The Bank of England’s base rate is currently 4.5%, but the Resolution Foundation says this is expected to peak at around 6% in mid-2024.

Those expectations quickly spilled over into the mortgage market, with deals being withdrawn or replaced by ones with higher interest rates.

On Friday, financial data firm Moneyfacts said the average two-year fixed-rate home loan stood at 5.98%, compared with 3.14% a year earlier.

The Resolution Foundation, which is an independent think tank focused on improving the living standards of people on low to middle incomes, said it did not expect the average two-year mortgage deal to fall below 4.5% until the end of 2027.

That would “significantly magnify the subprime crisis currently unfolding,” it said.

Overall, annual payouts are on track to be £15.8bn a year higher by 2026 than before when the Bank started its rate hike cycle in December 2021.

Resolution Foundation director Thorsten Bell said people often choose longer terms when they remortgage.

He told BBC Radio 4’s Today programme: “People are asking for a longer mortgage to stop the pain that is coming now through higher mortgage bills.

“It helps them through some tough times over the months and years, but overall the mortgage costs them significantly more.”

“How households deal with that pain is whether they pay more now or in the future.”

Eleanor Adair, from Bangor, County Down outside Belfast, has seen her mortgage costs jump from around £450 to £1,260 a month over the past year and a half. She has an adjustable rate mortgage that is almost entirely interest only to keep costs low,

The 61-year-old, who is disabled, said she now has to work Saturday mornings on top of her full-time job as an administrator to pay the bills.

“I exist—it’s almost like a form of slavery. I have also had late and missed payments which has affected my credit score so this is making it difficult for me. I just keep hoping that interest rates will stay low, but I don’t think that will be the case.”

The think tank said around three-fifths of the rise in annual mortgage payments was still not being passed on to households as borrowers moved from existing fixed-rate deals to new ones.

This was expected to cause a “permanent blow to living standards” of millions of households in the run-up to the next general election, it said.

But this included households with trackers and variable rate mortgages and the forecast was made at a time when the Bank of England’s prime rate was lower.

Former Bank of England governor Mark Carney has played down Brexit’s high inflation, saying it had triggered a “unique” correction that could take years to unwind.

He said Daily Telegraph that he had “outlined” his concerns about the UK leaving the EU, which would lead to a “weaker pound, higher inflation and weaker growth”.

Comparing the current situation to 1989, when interest rates reached almost 15%, the Resolution Foundation predicts that this year’s rate hike will increase the cost of a typical mortgage by 3% of typical household income, surpassing the 2.4% increase seen then.

But the organization said the current mortgage crisis was less widespread than previous shocks, which was “better news for the government”.

In 1989, although inflation was below 5.5%, nearly 40% of households owned a home with a mortgage and were therefore exposed to rising costs.

Now, with more older people owning their homes outright and fewer young people owning property at all, the share of households with a mortgage has fallen below 30%.

Simon Pittaway of the Resolution Foundation said: “Market expectations that interest rates will rise further and stay higher for longer are having a big effect on the mortgage market.

“Of course, market expectations may be wrong and the rate hike may not turn out to be as bad as feared.”

About 7.5 million people with mortgages are expected to see their mortgages paid off by 2026, the think tank said.

A spokesman for the Treasury said the government knew it was an “anxious time for mortgage holders” but lenders were required to offer personalized support to those struggling with mortgages by the Financial Conduct Authority.

“We continue to support mortgage holders through the Mortgage Rate Support Scheme.

“However, behind this is global inflation, which continues to eat away at incomes around the world, so the biggest thing we can do to help families is to halve the rate this year.”

“We also support the Bank of England in its independent decisions on interest rates and continue to provide around £3,300 per household this year and next to help with rising costs.”

But Labour’s shadow chancellor Rachel Reeves said: “These findings highlight once again how important economic stability and resilience are and how badly the Conservatives have failed at both.

“For 13 years the Tories weakened our economy and then crashed it, leaving working people to pay the price for years to come.

“Labour will bring back financial and economic security so that families are not permanently on the brink and so that we can urgently grow our economy to take advantage of the opportunities of the future.”

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