(Commonwealth) _ Millions of homeowners are bracing for a £19 billion surge in mortgage costs as an increasing number of fixed-rate deals expire, compelling borrowers to renegotiate their home loans following one of the most stringent rounds of interest rate hikes in decades.
Despite a recent price war among lenders aimed at reducing the expense of remortgaging, economists at the U.S. investment bank Goldman Sachs caution that a substantial number of UK households will still face a significant spike in repayments compared to their previous deals. Termed a “Tory mortgage timebomb” by critics of Chancellor Rishi Sunak, as many as 1.5 million households are anticipated to see the conclusion of more affordable deals in 2024. This could result in an annual increase of approximately £1,800 in housing costs for the average family, according to the Resolution Foundation think tank. As households grapple with the culmination of fixed-rate deals amid the most substantial financial strain since the postwar era, exacerbated by inflation and tax hikes impacting spending power, borrowers are resorting to various measures to cope with heightened expenses. Strategies include renting out rooms, early pension withdrawals, and even delaying family planning.
Sarah Olney, the treasury spokesperson for the party, has released research suggesting that the average household would be hit by over £4,700 from the combined impact of higher mortgages, taxes, and energy bills. She emphasizes the anxiety among people about managing bills and the necessity for significant cutbacks to make ends meet. In response, government ministers plan to assert on Saturday that they are alleviating the financial burden on households by fast-tracking a £10 billion reduction in national insurance. However, this cut may provide limited relief as it comes alongside a much larger six-year freeze on income tax thresholds, pushing tax levels as a share of the economy to the highest point since the Second World War. While some respite is expected in the spring, with the Bank of England likely to reduce interest rates to below 4% by year-end from the current 5.25%, the looming mortgage timebomb in 2024 remains a concern. This expectation of rate cuts is intensifying a competition among lenders to enhance mortgage offers. Notably, HSBC, Halifax, and TSB have updated their fixed-rate deals, contributing to the average rate on a two-year fixed home loan reaching its lowest level in nearly seven months.
Despite these adjustments, borrowing costs persist at more than double the levels seen two years ago, exacerbating the challenges for households grappling with escalating energy bills and the broader cost-of-living crisis. Goldman Sachs forecasts indicate that the peak impact on households due to increased mortgage costs may occur by the summer. The bank anticipates the Bank of England to initiate base rate cuts as early as May to mitigate the financial strain on households. Staying at elevated levels could potentially add £30 billion to mortgage repayments by the end of the next year, but a more likely scenario is a figure of £19 billion if the Bank aligns with expectations.
Despite the Bank’s senior policymakers pushing back against rate cut expectations just last month, the prospect of a pricing war potentially reducing the cost of remortgaging could be advantageous for the government. As the Conservatives aim to regain ground in the polls before the upcoming general election, any easing of pressure in the mortgage market may become a focal point. Recent figures from the Bank reveal a positive trend, with the number of new home loan approvals rising for a second consecutive month in November, reaching 50,100 compared to 47,900 in October. This potential improvement in the mortgage market may be seen as a positive indicator for the UK economy.
