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The Impact of Rising Mortgage Rates on UK Households

Every six weeks, at noon on Thursday, mortgage holders in Britain anxiously await the Bank of England’s announcement on interest rates. For the past year and a half, the central bank has consistently raised interest rates in an effort to combat high inflation. As rates continue to climb, millions of Britons find themselves allocating more of their income towards their monthly mortgage payments, leading to a slowdown in other expenditures. This unanticipated shift from a decade of low interest rates to a rapid surge is causing widespread financial distress across the country. As the situation worsens, concerns mount among affected households, stretched charities, and politicians facing an upcoming election.

When the Fix is In

Unlike the United States, where mortgage rates are often fixed for extended periods, many people in Britain have mortgages with rates fixed for shorter durations, typically two or five years. Consequently, when the fixed period expires, they must decide between a variable-rate mortgage or another fixed-rate loan. Over the past year, the average rate on two-year fixed-rate mortgages has surged to levels not seen since 2008. As a result, numerous homeowners are grappling with terms above 6 percent after being accustomed to rates below 2 percent.

The impact of higher interest rates varies greatly across the population. Approximately one-third of households in Britain own their homes outright and are shielded from the effects of rising mortgage rates. About the same proportion rents their homes, and many have already experienced significant rent increases. The remaining 28 percent of households have a mortgage, and on average, they will face an additional cost of nearly £280 (approximately $365) per month if mortgage rates remain at current levels compared to rates in March 2022, according to the Institute for Fiscal Studies. This burden will be more pronounced for individuals under the age of 40.

Timing is Everything

The timing of the interest rate increase will play a crucial role in its impact on households. A shift among home buyers towards fixed-rate mortgages over the past decade means that not everyone will immediately feel the effects of higher interest rates. However, as rates continue to remain elevated, more homeowners will have to accept higher fixed rates. The Bank of England estimates that by the end of the year, around three million mortgage holders will experience an increase of up to £500 ($650) per month in their payments.

To date, approximately 4.5 million households have already experienced payment increases since the Bank of England began raising interest rates in December 2021, with an additional four million households expected to be affected by higher rates by the end of 2026. Despite this, the central bank estimates that the overall financial burden will still be lower than during the 2008 financial crisis.

While the situation poses significant challenges for individual households seeking to refinance, it is important to note that the country’s households are less indebted than they were during the 2008 financial crisis. As a result, there are lower risks of property repossessions, and lenders are in a better position to provide assistance. However, the sharp increases in mortgage payments may reduce households’ spending capacity, ultimately impacting the nation’s economic growth.