Homeowners are facing a £19bn surge in mortgage costs as millions more fixed-rate deals expire and borrowers are forced to renegotiate their home loans following the toughest round of interest rate increases in decades.
Despite an escalating price war between major lenders cutting the cost of remortgaging in recent days, economists at the US investment bank Goldman Sachs said many UK households would still face a dramatic leap in repayments compared to the deals they were leaving behind.
In what has been labelled a Tory mortgage timebomb by Rishi Sunak’s critics, as many as 1.5 million households are expected to reach the end of cheaper deals in 2024 – with an increase in annual housing costs of about £1,800 for the typical family, according to the Resolution Foundation.
As fixed-rate deals expire and households absorb the biggest hit to their finances in the postwar age, with inflation and a freeze on tax thresholds taking their toll on spending power, borrowers are turning to a range of measures to cope with the increased costs, from renting out rooms in their homes to drawing down pensions early and even postponing having children.
Pressure should begin to ease in the spring, with the Bank of England widely expected to cut interest rates to below 4% by the end of the year from the current level of 5.25%.
The expectation of a round of rate cuts is triggering a bidding war among major lenders to improve their mortgage offers. HSBC, Halifax and TSB have all updated their fixed-rate deals, and the average rate on a two-year fixed home loan has this week fallen to its lowest level for nearly seven months.
Borrowing costs remain far higher than two years ago, though, adding to pressure on households struggling with their energy bills and rising taxes amid the cost of living crisis.
Alice Haine, personal finance analyst at investment platform Bestinvest, said: “The mortgage market may be heating up with rate cuts dominating the news, but this won’t fully ease the pain for the roughly 1.6 million existing borrowers with cheap fixed-rate deals expiring this year.
“They still face a heavy jump in interest payments when they switch onto a new product, with the only comfort that the situation could have been much worse.”
About 55% of UK mortgages have been moved onto a higher interest rate since borrowing costs started to rise from a record low of 0.1% in December 2021, and another 5m mortgages are expected to be re-priced by 2026.
Torsten Bell, the chief executive of the Resolution Foundation, said: “Bear this is mind when you read news stories saying ‘homeowners will benefit from a fall in mortgage rates’ – what they mean is that the increase in people’s mortgage bills won’t be as painful as they would otherwise have been.
“I’d gently suggest they won’t feel like they’re ‘benefiting’ as their mortgage bill rises by hundreds of pounds a month.”
In forecasts suggesting the peak impact on households would come by the summer, Goldman Sachs said it expected the Bank to begin cutting its base rate from as early as May. It said that sticking at higher levels could add £30bn to mortgage repayments by the end of next year, but that a figure of £19bn was more likely if the Bank followed through with its expectations.
The speculation in the City over interest rate cuts comes after the Bank’s most senior policymakers had pushed back against financial market expectations as recently as last month. After leaving borrowing costs on hold in December, Andrew Bailey, the Bank’s governor, said it was “really too early to start speculating” about rate cuts.
However, the prospect of a pricing war softening the cost of remortgaging is likely to be seized upon by the government, as the Conservatives battle to overturn a commanding Labour lead in the polls before the general election.
Figures from the Bank on Thursday showed the number of new mortgage approvals rose for a second month in a row in November to 50,100, up from 47,900 in October, reflecting rising demand as borrowing costs subside.
HSBC became the latest big UK lender to announce across-the-board mortgage interest rate cuts on Wednesday, offering a five-year fixed remortgage deal of 3.94% for those borrowing up to 60% of the property value. Earlier in the week Halifax, the nation’s largest mortgage lender, cut the price of its two-year fixed remortgage deals from 5.64% to 4.81%.
Moneyfacts, the financial information service, said on Thursday the average rate on a two-year fixed deal had fallen from 5.92% to 5.87% in a day. However, this is still more than double the average rates available in late 2021.
