A leading think tank has said that 320,000 British adults have been pushed into poverty by the steepest rise in mortgage costs since the 1980s.
The Institute for Fiscal Studies (IFS) highlighted the damage caused by the UK’s mortgage time bomb, saying individuals who have had to renew their mortgage or take out new borrowing in the past two years have experienced a sharp fall in disposable income.
The report said some households were paying thousands of pounds more in extra mortgage payments, which could have led to a rise in mortgage borrower poverty rates of 1.4 percentage points between December 2021 and December 2023.
The report said the sharp increase in relative poverty – defined as people living in households with income below 60 percent of the median income – was equivalent to an increase of 320,000 adults living below the poverty line.
Millions of homeowners are facing soaring borrowing costs after the Bank of England’s base rate was raised for the 14th time in a row, from a record low of 0.1% in December 2021 to the current 5.25%, the most aggressive inflation tackling measure in the past 40 years.
In response, mortgage rates charged by the big banks have skyrocketed, including after Chancellor Liz Truss’ disastrous mini-Budget announcement in September 2022, when financial market panic drove the cost of the average two-year fixed-rate mortgage to more than 6%.
But the impact is being felt unevenly, as it takes time to pay off low-interest, fixed-rate mortgages that were signed before borrowing costs soared. While millions of people who own their homes outright are relatively protected, renters are also facing steep increases in costs.
The IFS said measuring poverty in official statistics was problematic because inflation rates and mortgage costs vary depending on household circumstances.
Rising energy and food prices meant that low-income earners and pensioners faced higher than average inflation rates because they typically spend more of their monthly budgets on these items, but this is not captured in official poverty statistics.
The IFS said that taking into account rising inflation rates for these households, the number of poor would rise by 210,000 more than captured in the official statistics for 2021-22 and 2022-23, bringing the total to 730,000 instead of 520,000.
Official statistics also use average mortgage interest rates but the IFS said this did not take into account the fact that some borrowers were still on lower interest rates whilst others had to refinance their mortgages at significantly higher rates.
The report found that average mortgage rates for 2022-23 will be around 2.3%, meaning the typical borrower will pay £240 a month in interest, but a tenth of households face rates of at least 4.7%, or £490 a month in interest payments.
After newsletter promotion
The IFS analysis is likely to be used by the new Labour government as it seeks to hold Ms Truss and the Conservatives responsible for the “economic collapse” and the soaring cost of living.
Mortgage costs have started to fall in recent months on hopes that the Bank of England will cut public borrowing costs, with fixed rates returning to trading below 4% this week for the first time since February.
Financial markets expect the central bank to keep interest rates unchanged next week, but the decision is expected to be a delicate one after inflation remained at its 2 percent target for the second consecutive month in June.
Peter Matejczyk, principal analyst at the Joseph Rowntree Foundation, which funded the IFS report, said: “This survey shows that the cost of living crisis has not been felt equally by everyone, with more people struggling to heat their homes and pay their bills than before the pandemic, particularly those on lower incomes.”
“The report raises many questions about whether Social Security is adequate for the challenges looming for struggling households. The new government cannot wait for growth after years of cuts, caps and freezes to Social Security have robbed families of the financial resilience and security they need to cope with rising prices and costs.”
