As many as 320,000 UK adults have been pushed into poverty by soaring mortgage costs after the sharpest increase in interest rates since the 1980s, a leading thinktank has said.
Highlighting the damage caused by Britain’s exploding mortgage timebomb, the Institute for Fiscal Studies (IFS) said individuals who needed to renew their home loans or take out new ones in the past two years had experienced a sharp fall in their disposable income.
It said some households were paying thousands of pounds more in additional mortgage payments, in a development that was likely to have driven up poverty rates among mortgagors by 1.4 percentage points between December 2021 and December 2023.
It said this jump in relative poverty – defined as people living in households with income below 60% of the median – was the equivalent of 320,000 more adults falling below the breadline.
Millions of homeowners have faced a leap in borrowing costs after 14 consecutive increases in the Bank of England base rate from a record low of 0.1% in December 2021 to 5.25%, where it sits now, in its most aggressive assault on inflation for four decades.
Mortgage rates set by high street banks have surged in response – including a spike after Liz Truss’s disastrous mini-budget in September 2022, when panic in the money markets pushed the cost of an average two-year fixed-rate mortgage above 6%.
However, the impact has not been evenly felt, as it takes time for households to reach the end of cheaper fixed-rate mortgage deals taken out before the surge in borrowing costs. The millions who own their homes outright have been comparatively sheltered, while renters have also faced a sharp rise in costs.
The IFS said there were issues with the measurement of poverty in official statistics because households experienced different rates of inflation and mortgage costs based on their circumstances.
Higher energy and food prices mean that people on lower incomes and pensioners faced a higher inflation rate than average, because they typically spend more of their monthly budgets on these items. However, this is not captured by official poverty statistics.
The IFS said taking account of higher inflation for these households implied the number of people in poverty rose by 210,000 more than captured in official statistics for 2021–22 and 2022–23, meaning a total of 730,000 rather than 520,000.
Official figures also use an average for mortgage interest rates, which the IFS said failed to account for the fact that some borrowers were still locked into cheaper deals, while others had needed to remortgage on to significantly higher rates.
It said that the average mortgage rate in 2022-23 was about 2.3%, translating into interest payments of £240 a month for a household with typical borrowing. But a tenth of households faced rates of at least 4.7%, equivalent to £490 a month.
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The IFS analysis is likely to be seized on by the new Labour government, which has sought to pin the blame on Truss and the Conservatives for “crashing the economy” and driving up living costs.
Mortgage costs have begun to fall back in recent months – including the return this week of fixed-rate deals below 4% for the first time since February – amid hopes of a cut in official borrowing costs from the Bank of England.
Financial markets are predicting that the Bank will leave interest rates unchanged next week, although the decision is expected to be on a knife-edge after inflation remained at its 2% target for the second month running in June.
Peter Matejic, chief analyst at the Joseph Rowntree Foundation, which funded the IFS report, said: “This research shows the cost of living crisis wasn’t felt equally by everyone. Compared with before the Covid pandemic, many more people, especially those on a lower income, struggled to heat their homes or keep up with their bills.
“This report raises many questions about whether social security is adequate for the challenges looming over struggling households. The new government can’t wait for growth, after years of cuts, caps and freezes to social security have left families without the financial resilience and security they needed to cope with higher prices and costs.”