Warning over mortgage ‘timebomb’ from biggest hike in payments ever

Homeowners are facing the biggest surge in mortgage interest payments ever, it is claimed today, and thousands with a typical home loan outstanding will see their monthly charges double to nearly £500 next year.

The shock rise was predicted after analysis of figures published by the Treasury watchdog, the Office for Budget Responsibility (OBR), and follows attempts by the Bank of England to curb rising inflation by raising interest rates, leading to increases in the mortgage interest rates.

The Liberal Democrats, who carried out the analysis, calculated that for an average household with an outstanding mortgage of £236,000, the next year’s increase would mean monthly interest payments would double to £474 – an extra £2,851 a year.

The news will fuel new fears that the cost-of-living crisis will lead to property repossessions.

Last night, Lib Dem Treasury spokesperson Sarah Olney said, “Homeowners are paying the price for the Conservative government collapsing the economy.

The mortgage ticking time bomb has only a few seconds left.

“This is just unmanageable with the tax increases the chancellor has announced.”

The party wants the government to scrap a planned cut in banking sector surcharges and use the money to set up an emergency mortgage protection fund to help families skyrocket their repayments.

The OBR bases its figures on its forecast for the Bank of England’s key interest rate, which is currently expected to peak at nearly 5% in 2023-24.

It said it thinks average interest rates on outstanding mortgages will peak at 5 percent in the second half of 2024, the highest level since 2008.

New mortgage rates are already above this level, but the OBR said, “Due to the relatively large share of fixed-rate mortgages, it will take some time for higher rates on new mortgages to be passed through into higher average mortgage rates on the debt stock.”

Anyone who currently has a variable or tracker mortgage, and those whose fixed rate is expiring, are at risk from the higher costs. It is thought that as many as 1.8 million homeowners will come to the end of their fixed-rate contracts by 2023.

Borrowers can use This is Money’s interest rate increase calculator to work out how much their monthly payments could increase depending on several possible base interest rate changes.

How high will the interest be?

Earlier this month, the Bank of England raised the base rate from 2.25 percent to 3 percent. The move came as it continued to try to bring inflation under control, and the 0.75 percentage point increase was the biggest increase in key interest rates since October 1989.

Proportionally, however, it was larger than that, as the Bank of England increased it by 1.13 percentage points from 13.75 percent to 14.88 percent at the time.

It was the eighth consecutive increase in base rates by the Monetary Policy Committee since December 2021 – decisions that have led to a significant rise in mortgage rates.

But rates were also pushed up by the fallout from Liz Truss and Kwasi Kwarteng’s mini-budget, which delivered a massive round of unfunded tax cuts, shattered market confidence in UK government bonds and led to a sell-off in the gilts market.

This sparked fears that the Bank of England would have to raise rates even further and the uncertainty led banks and building societies to take up mortgages and reprice remaining offerings at much higher rates.

This turmoil has since died down, with Jeremy Hunt and Chancellor and Rishi Sunak as Prime Minister restoring a sense of stability and the Bank of England staging an intervention in the gilts market over pension fund concerns.

The Bank of England will continue to raise interest rates to curb inflation, but how fast they will go is hard to predict. It will ultimately be a balancing act between controlling inflation and averting a painful recession.

Just over a month ago, the general consensus was that the base rate would rise to 6 percent next year.

However, some have now revised their views, partly due to the change in government and economic policies. Economists now expect base rates to peak at around 4.75 percent.