London home owners face a devastating £1.4 billion mortgage “ticking timebomb” over the next three years as they are forced to replace cheap fixed rate deals with far more expensive loans, according to new analysis.
Research by the Resolution Foundation think-tank warns that the Bank of England interest rate hikes — from 0.1 per cent to 4.5 per cent — since December 2021 means that repayments will balloon for thousands of London families.
The report, written by senior economist Simon Pittaway, says that the overwhelming popularity of fixed rate deals means that only about a third of the impact has been felt so far by mortgage holders and “there is still a lot more pain to come”. It estimates that over the next year total annual mortgage payments made by London homeowners will rise by about £900 million and by 2026 they will be £1.4 billion higher.
Mr Pittaway added: “The total burden of mortgage repayments has increased significantly already. And repayments are set to increase further as more and more households roll off their fixed-rate deals over the coming years.”
About 17 per cent of the total stock of outstanding mortgage debt in the UK is held in London, according to the foundation. In most cases, home owners coming off mortgages with rates around two per cent will be faced by current average rates of 5.38 per cent for two year deals and 5.05 per cent for five year fixes, according to latest figures from analysts Moneyfacts. That will be enough to add about £6,500 to the annual payments on a typical London £350,000 mortgage.
The outlook has worsened over the past week after disappointing inflation figures sent gilt yields soaring to levels not seen since the aftermath of the mini-Budget last autumn.
Bond markets now fear that the Bank will be forced to hike its rate further than previously feared to 5.5 per cent by the end of the year — and stay high longer — to control inflation.
The stark situation facing borrowers was underlined by Chancellor Jeremy Hunt on Friday when he said he would be “comfortable” with interest rates rising to a level where they tipped Britain into recession — if that was the price for curbing inflation.
The Resolution Foundation report says that “poorer and younger mortgagors will experience the biggest squeeze from higher interest rates”.
The impact of higher mortgage payments at a time of already falling living standards as a result of inflation is already making it hard for many families to cope, according to debt charities. StepChange said its data showed increasing numbers of homeowners struggling to cope with their day to day finances as mortgage rates have soared.
Earlier this month the Bank ordered a 12th consecutive rise in its interest rate to a 14-year high of 4.5 per cent. The move will immediately hit an estimated 150,000 borrowers on tracker or variable rate mortgages in London. The majority on fixed rates will only be affected when their deals expire but then face huge increases in their bills.
Stepchange said polling carried out on its behalf by YouGov showed 45 per cent of mortgage holders are now struggling to meet their household bills and other credit commitments.
Separate data from Citizens Advice shows that mortgage holders have seen a far bigger drop in their disposable income than private or social renters over the past year. Some are now finding it impossible to meet their mortgage payments with the number of repossessions jumping by half to 750 in the first quarter of this year.
Lib Dem leader Sir Ed Davey said: “Homeowners in London are facing a ticking timebomb as rates go through the roof. Rishi Sunak can no longer just blame Liz Truss and the aftermath of her mini-Budget, this mortgage crisis is getting worse under his watch. We desperately need a mortgage rescue fund to prevent struggling families losing their homes.”
A Treasury spokesman said: “We understand that this is a difficult time for mortgage holders across the country and are providing significant support over this year and next... including uprating benefits and the state pension by 10 per cent and holding down energy bills.”
