The Bank of England is nearing the end of its rate-rising cycle, but two-thirds of Britain’s mortgage-rising pain is still to come

The Bank looks set to have almost finished the sharpest interest rate tightening cycle since the 1980s, but the switch from variable to longer fixed-rate mortgages has delayed the impact on households, with two-thirds of the eventual £12 billion increase in annual mortgage costs still to be passed on, according to new research published today (Saturday) by the Resolution Foundation.

The Foundation notes that the Bank of England’s decision to combat high inflation by raising interest rates for the twelfth consecutive time to 4.5 per cent last Thursday – a rise of over four percentage points in less than 18 months – is the sharpest increase in rates since the late 1980s (when rates rose by more than seven percentage points over a similar period).

However, while this rate-rising cycle has been sharp, the growing popularity of fixed-rate mortgage deals – which have gone from accounting for just £4 of every £10 lent pre-financial crisis, to over £9 of every £10 lent last year – means that the majority of the impact on mortgagor households is still to come, with mortgage cost rises delayed until the point at which deals expire.

This has been compounded by the growing popularity of longer-term deals, with five-year fixes overtaking two-year fixes to become the most popular deal between 2016 and 2022.

As a result, of the 7.5 million mortgagor households that will eventually be affected by the rate rising cycle since the end of 2021, around half have yet to see a change in their mortgage rate.

Furthermore, with interest rates expected to fall more slowly than they have risen, mortgage costs are set to remain elevated for some time. Market prices suggest the average rate on new mortgages will remain above 4 per cent until the end of 2026. As a result, households have so far faced just a third of the eventual £12 billion a year rise in mortgage costs that the current rate-rising cycle will bring.

The Foundation notes that this year will be a particularly bruising one for many homeowners. Between Q1 2023 and Q4 2024, total repayments are set to rise by £5.3 billion, as around 1.6 million households see their fixed-rate deals expire and face an average increase in their annual mortgage bill of around £2,300.

Richer households – who are more likely to own a home with a mortgage than poorer households, and tend to live in more expensive homes, will face the majority of the £12 billion rise in mortgage costs. Three-quarters of this rise will be borne by the richest two-fifths of households.

However, the scale of the living standards shock will be greatest for those low-and-middle income households who are affected. The Foundation finds that repayments will increase by more than 4 per cent of income for mortgagors in the second lowest income quintile, compared to just 2 per cent for the highest income households.

Younger home-owning families – who tend to have lower incomes than older households and higher mortgages relative to those incomes, will also face a bigger living standards hit. Repayments for 18-34-year-old mortgagors are projected to increase by 3.4 per cent of income – nearly double the 1.8 per cent increase for mortgagors aged 55 and above.

Simon Pittaway, Senior Economist at the Resolution Foundation, said:

“Last Thursday the Bank of England raised interest rates for the twelfth time in a row, but also indicated that the sharpest rate-rising cycle since the 1980s is nearly at an end.

“But while interest rate rises might be coming to an end, there will be plenty more mortgage pain to come. Two thirds of the £12 billion a year increase in mortgage costs that British households face as a result of rising rates is still to come.

“People moving onto new fixed-rate deals over the next year can expect to see their annual mortgage costs rise by an eye-watering £2,300 – with young families and low-and-middle-income households with mortgages facing the biggest living standards hits.”