Millions benefited from mortgages fixed at low prices – now many are struggling with much higher monthly payments

The impact of higher mortgage costs is now biting hard. Three million UK households face the prospect of having to renew their mortgage within the next two years as their fixed-rate periods come to an end. While nearly two-thirds of all borrowers have already remortgaged at more expensive rates, a large number are still waiting to do the same.

The Bank of England’s recent financial stability report^[1] highlighted how vulnerable household budgets are to increased mortgage costs. Many are still on fixed rates below 3% for mortgages they borrowed before the interest rates started to rise in December 2021^[2]. According to the bank, around 400,000 of these households will experience very large increases in their monthly payments, of 50% or more.

This is because the mortgage rates now being offered are above 5%^[3] for two-year fixed-rate deals, and around 6% for house buyers with lower deposits. For a household with a mortgage debt of around £200,000, the UK average^[4], a mortgage rate rise from 2% to 5% increases the monthly repayment costs by about £500.

Mortgage prices are directly linked to the Bank of England’s base rate. They have reached these high levels due to soaring increases in the base rate^[6], as the UK’s central bank sought to reduce inflation to the desired level of 2%.

The good news is that as inflation has now eased from its peak of over 11% in October 2022 back to 2% in May 2024^[7], rates cuts are probable soon. Financial markets expect the first cut^[8] by the Bank of England, possibly of 0.25 percentage points, on August 1 2024.

The bad news is that mortgage rates still probably won’t drop to the ultra-low levels of below 2% seen between 2009 and 2021. Historically, mortgage rates had never been below 4%^[9] before that period, at least since banking records began in 1853. Experts stress that the new normal for mortgage rates in the medium-to-long term will be between 3.5% and 4.5%^[10]. Households have almost no option but get used to these higher costs.

Furthermore, the process of central bank rate cuts is slow. Current market expectations are that the bank rate will ease to an annual average of around 3.5% in 2026^[11]. High-street banks charge slightly higher rates for mortgages, compared with the base rate, to cover their operational costs. Hence, there is still a couple of years to go to reach the predicted mortgage rates of 3.5-4.5%.

How are households coping?

In recent years, households have been under pressure due to soaring living costs with inflation high. And while the rate of inflation has been decreasing recently, this does not mean prices are going down. They are still increasing, just at a slower rate.

For some people, robust wage growth^[12] and low unemployment levels have helped them cope with the cost of living crisis. But the Bank of England’s latest financial stability report^[13] highlights that low-income households suffer most from the effects of increased living costs and mortgage rates.

The bank’s recent survey^[14] found that 34% of UK households talked about interest rises putting pressure on their finances. Many cope either by dipping into their savings or putting less aside then they normally would. So, the bank expects many people’s savings to run down in the coming years, making a lot of households less financially resilient.

According to the survey, many households whose monthly mortgage repayment had risen said they were spending less, taking up additional work, or looking for cheaper properties.

How people are making savings: