320,000 Adults Face Poverty Due to Increasing UK Mortgage Rates

Some households, according to the report, were making thousands of pounds worth of extra mortgage payments.

According to a reputable think tank, up to 320,000 people in the UK have been forced into poverty as a result of skyrocketing mortgage payments following the biggest increase in interest rates since the 1980s.

The Institute of Fiscal Studies (IFS) highlighted the harm done by Britain’s blowing mortgage timebomb by stating that people’s disposable income had drastically decreased for those who had to take out new loans or renew existing ones during the last two years.

Some households, according to the report, were making thousands of pounds worth of extra mortgage payments, which is expected to have increased the percentage of borrowers who are poor by 1.4 percentage points between December 2021 and December 2023.

According to the report, 320,000 more adults would be living below the poverty line as a result of this increase in relative poverty, which is defined as those who live in homes with incomes less than 60% of the median.

The Bank of England’s base rate increased 14 times in a row, from a record low of 0.1% in December 2021 to 5.25% today – the highest level it has been in four decades – putting millions of homeowners at risk of skyrocketing borrowing rates.

High street banks have responded by raising mortgage rates, which included a rise following Liz Truss’s disastrous mini-budget in September 2022, when money market panic drove the average cost of a two-year fixed-rate mortgage beyond 6%.

Since it takes time for households to pay down lower-rate fixed-rate mortgages put out prior to the spike in borrowing costs, the impact has not been felt equally by all. Renters have seen their costs grow dramatically, but the millions of homeowners who own their homes entirely have been relatively protected.

The IFS claimed that because households’ experiences with inflation and mortgage payments varied according to their circumstances, there were problems with how poverty was measured in official statistics.

Seniors and those with lesser incomes saw a higher inflation rate than average due to rising costs for food and energy, as these expenses usually accounted for a larger portion of their monthly budgets. Nevertheless, official poverty figures do not account for this.

According to the IFS, accounting for the higher inflation rates for these households suggests that the overall number of individuals living in poverty increased by 210,000 over the official figures for 2021-2022 and 2022-2023 (i.e., 730,000 as opposed to 520,000).

The IFS claimed that official statistics, which also use an average for mortgage interest rates, did not take into consideration the fact that some borrowers were still bound to lower rates while others had to refinance at much higher rates.

As per the report, the average mortgage rate in 2022-2023 was 2.3%, which meant that a household with a standard loan amount would have to pay £240 in interest per month. However, rates for a tenth of families were at least 4.7% or £490 per month.

The new Labour government, which has attempted to blame Truss and the Conservatives for “crashing the economy” and raising living expenses, is probably going to seize onto the IFS report.

Expected reductions in official borrowing costs from the Bank of England have led to a recent decline in mortgage costs, which includes the return this week of fixed-rate options below 4% for the first time since February.

The Bank is expected to keep interest rates steady next week, according to financial markets, however, the decision is likely to be close to the bone given that inflation in June was below the Bank’s objective of 2% for a second consecutive month.