A million households set for their mortgage repayments to rise by £500 a month.
Last week, the Bank of England (BOE) published its bi-annual financial stability report. The financial stability report sets out the BOE’s view on the stability of the UK’s financial system. In that report, the bank highlights that more than a million households are set to have their mortgage repayments increase by £500 by the end of 2026. And more than two million households will pay between £200 and £499 more a month by the end of 2026.
Source: Bank of England
Expectations that borrowing costs might rise even further have pushed up mortgage rates. According to Moneyfacts, the average two-year mortgage rate as of Thursday this week stood at 6.79%, and the five-year fixed rate at 6.31%. In the shorter term, the average household coming off a fixed-rate deal in the second half of 2023 will have to pay about £220 more monthly if they re-mortgage on current rates.
Good news on inflation this week:
According to the Office for National Statistics, inflation in the year up to June has dropped to 7.9% this week. The inflation rate fell from 8.7% to 7.9%, a bigger drop than most experts had forecast. This is good news for mortgage holders and borrowers as the reaction of the markets was immediate as interest rate expectations fell sharply, with traders pricing in a peak for Bank of England’s (BOE) rate below 6%, which was near 6.5% last week.
This should relieve those mortgage holders re-mortgaging, as this market expectation will start to feed through fixed-rate mortgages, meaning the average two-year and five-year fix will likely drop. Anyone looking to re-mortgage in the next few weeks and months should wait to fix it, as rates will likely drop further due to the new inflation figures.
Strong labour market:
Andrew Bailey, Governor of the BOE, highlighted in the bi-annual report that a much stronger employment market was helping a lot in terms of the stress that households are seeing. The unemployment rate has ticked higher at 4% but remains relatively low, adding that wage rises, linked to a strong labour market, are helping keep inflation high. Wages last month grew by 7.3%, which matched the highest level on record.
More robust than expected wage growth could keep inflation higher, meaning interest rates remain at higher levels for longer. However, most inflationary-causing measures have been influenced by macro factors. With inflation running high for the last two years, we will likely see UK inflation dropping to European and US levels as the government and BOE policies impact inflation.
The BOE also points out in its report that although the proportion of income that UK households spend on mortgage payments is expected to rise, it expects it to remain below peaks seen during the global financial crises and in the early 1990s. Strong wage growth and falling inflation should see households start to feel the cost-of-living pressures ease slightly. However, we expect interest rates to begin falling in Q4 of 2024. Inflation will drop more rapidly in the UK compared to some estimates, as it has done in Europe and the US. After next month, the policymakers should look to maintain the base rate around 5.25% before it falls at the end of next year.