Londoners and the under-40s will be hardest hit by the mortgage rise juggernaut battering Britain which is also sending rents spiralling, leading economists warned on Wednesday.
The Institute for Fiscal Studies laid out the scale of the exploding home loans crisis as fears sky-rocketed that the Bank of England will be forced to hike interest rates far higher than expected in a desperate bid to tame runaway inflation.
A torrent of dismal data showed:
- Entrenched inflation remained at 8.7 per cent in May, the same as April, pushed up by the cost of air fares, second-hand cars and computer games, and worse than predicted in the City.
- More worryingly, core inflation — which excludes food and energy prices — rose to 7.1 per cent, the highest since March 1992.
- Britain’s debt mountain hit £2.6 trillion in May — or more than we all produce in a year.
- Food inflation was still hammering family budgets despite being down slightly, from 19.1 per cent in April to 18.4 per cent, after hitting a 45-year high in March.
The “stickiness” of inflation prompted City traders to bet that the Bank will hike its interest rates to six per cent, a level unseen this century, in an attempt to slow demand.
The Bank’s Monetary Policy Committee is meeting tomorrow and there were some predictions it could go straight for a “jumbo hike” from 4.5 per cent to five per cent.
Amid the gloom, the new IFS report warned that some 1.4 million mortgage holders — including about 300,000 in London — will see their mortgage payments rise by at least 20 per cent of their disposable income as they move from low to far higher rate deals. It stressed that about 690,000 of the 1.4 million are aged under 40.
London will see the largest average rise in monthly mortgage bills, of £520, it added, compared to £390 for the wider South-East, and below £200 across the North and East Midlands.
The fall in disposable income due to soaring home loan bills will be on average 12 per cent in London, 9.4 per cent in the South-East and about six to seven per cent in much of the North, Midlands, Scotland and Wales.
Renters are also seeing “very large increases” in their rent as landlords pass on the cost of rising mortgages.
Tom Wernham, co-author of the IFS report, said: “Given the cost-of-living pressures people are already facing due to high food and energy price inflation, these significant increases in mortgage costs could not come at a worse time.”
The think tank said that since March 2022 the average two-year fixed rate mortgage has risen from 2.65 per cent to just over six per cent. About 300,000 fixed rate mortgages are coming to an end every three months.
If mortgage rates remain at current levels, eventually mortgage holders will see their home loan payments rise on average by £280 per month, compared to the rates in March 2022, it added.
This equates to 8.3 per cent of their disposable income (calculated as income after mortgage payments).
The biggest rise is for those in their thirties, for whom payments will jump by £360 per month, or 11 per cent of disposable income.
The report also said: “Renters have also seen very large increases in their rents over recent months. It is likely that at least part of the increases in rents we are seeing is due to high interest rates hitting landlords’ borrowing costs.”
The latest inflation figures showed olive oil up 46.9 per cent in May, compared to a year earlier, eggs 28.8 per cent, pasta and couscous 28.5 per cent, low-fat milk 28.5 per cent, yoghurt 23.4 per cent, potatoes 22.4 per cent, jams, marmalades and honey 22.9 per cent.
Fears of higher Bank interest rates sent gilt yields — which lenders use to price mortgages — even higher, with two-year gilt yields close to the 15-year highs reached on Monday.
