Higher monthly home loan costs will pull another 400,000 people into poverty in the coming year as the fallout from dearer mortgage rates ricochets through the housing market.
The Joseph Rowntree Foundation (JRF) said an extra 120,000 households in the UK, the equivalent of 400,000 people, will be plunged into poverty when their current mortgage deal ends.
The analysis assumes that mortgage rates remain high and homeowners are forced to move on to an interest rate of 5.5%. With a current norm of 2% this change would mean spending 54% of their monthly income on housing costs, up from 38%. In cash terms this equates to an average increase of £250, from £610 a month to £860 a month.
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Mortgage rates have been rising because of this year’s run of Bank of England base rate rises but shot up after Kwasi Kwarteng’s disastrous mini-budget and have remained high.
The warning comes after the Bank of England pushed up the cost of borrowing to 3% in the biggest single interest rate rise since 1989. However, the impact on the mortgage market was muted as lenders had already priced in a chunky rate rise with some actually trimming their rates amid calmer financial markets.
On Friday the cost of an average two-year fix stood at 6.45%, while an average five-year deal was 6.28%, according to the data firm Moneyfacts. Just more than a year ago it was possible for mortgage borrowers to lock in to an interest rate of less than 1% for two or five years.
People on low incomes with mortgages are already under extreme financial pressure as rising food, fuel and energy costs stretch household budgets to the limit. JRF says 750,000 households, or 2.4 million people, with a mortgage are already in poverty.
The turmoil in the mortgage market would increase competition for rental properties and could result in rents for new lets rising sharply as buy-to-let landlords pass on their higher loan costs, the anti-poverty charity said.
Even if the housing market returns to “normal”, in which mortgage rates fall back to below 3% and house prices are steady, lending criteria could be stricter, making it more difficult for first-time buyers to get on the property ladder, it said.
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The JRF senior policy adviser, Darren Baxter-Clow, said the government should step in to support homeowners and renters affected by the mortgage crisis but should not “prop up a broken housing market”.
“Exorbitant house prices have shut millions out of homeownership for decades and trapped too many in an unaffordable, insecure, and poor-quality private rented sector,” he said.
