Two thirds of £12bn inflation-linked mortgage rate rises yet to be passed on to homeowners

The Bank of England could soon stop raising interest rates, but the pain for homeowners will last much longer as only a third of increases in inflation-related mortgage costs have so far been passed on, according to a new report.

The bank has chosen to counter high inflation by raising interest rates twelve times in a row since December 2021, with the most recent increase to 4.5 percent taking place last week.

According to a new report from think tank the Resolution Foundation, this will result in a total increase in annual mortgage payments of £12bn at the end of this rising ‘cycle’.

However, the report says only a third of that total £12bn increase so far has been passed on to homeowners in the form of higher monthly payments – meaning the worst is yet to come.

The base rate has risen from 0.1 percent to 4.5 percent in 18 months – the strongest increase since the late 1980s – and has led to substantial increases in average mortgage rates.

However, the impact of rate hikes on homeowners has been gradual, as the vast majority have fixed-rate mortgages.

Bank of England boss Andrew Bailey announced the latest rate hike last week, saying nearly 90 per cent of homeowners with a mortgage are now locked in for two or five years.

This means that their rate and their monthly payments cannot change until they come to the end of their fixed term, which is usually two or five years.

The Resolution Foundation says that of the 7.5 million mortgaged households that will eventually be hit by the cycle of interest rate hikes, about half have yet to see a change in their mortgage rates.

> How much will a rate increase cost you? Find out with our interest calculator

Fixed rate: Bailey said the share of fixed rate mortgages had risen significantly

According to Moneyfacts, the average two-year fixed mortgage rate is now 5.26 percent, with a five-year fix at 4.97 percent.

Around this time last year, those mortgage rates were 3.03 percent and 3.17 percent respectively.

And since interest rates are expected to fall more slowly than they rose, mortgage payments will remain high for some time, meaning homeowners will pay more and longer.

It is difficult to accurately predict what will happen to mortgage rates in the coming years, but currently swap rates suggest that they will remain above 4% until the end of 2026.

Fixed-rate mortgages have risen sharply since September 2022, but are now leveling off

Who will feel the mortgage interest the most?

Total mortgage repayments will rise by £5.3 billion between early 2023 and late 2024, according to the Resolution Foundation’s analysis.

During this time, around 1.6 million households will see their fixed rate contracts come to an end and will experience an average increase in their annual mortgage bill of around £2,300.

Wealthier households, more likely to be mortgaged and tend to live in more expensive homes, will account for most of the £12bn increase in mortgage payments.

The report claims that three-quarters of the £12bn increase will be borne by the wealthiest two-fifths of households.

However, less affluent households may end up taking a bigger hit on their monthly income.

The Resolution Foundation said repayments would increase by more than 4 percent of income for homeowners with mortgages in the second-lowest income quintile, compared to just 2 percent for the highest-income households.

Younger homeowner families may also experience higher living standards, as they tend to have lower incomes and higher mortgages relative to the value of their home.

Mortgage payments for 18-34-year-olds are expected to rise by 3.4 percent of income — almost double the 1.8 percent increase for those 55 and older.

Simon Pittaway, senior economist at the Resolution Foundation, said: ‘Last Thursday, the Bank of England raised interest rates for the twelfth consecutive time, but also indicated that the sharpest rate hike since the 1980s is about to end.

“But as rate hikes may be coming to an end, there will be a lot more mortgage pain to come.

“People moving to new fixed-rate deals over the next year can expect their annual mortgage costs to rise by an eye-watering £2,300 – with young families and low- and middle-income households with mortgages facing the biggest hits in living standards.”