Households are saving more and spending less as they prepare for an expected sharp rise in mortgage costs when their fixed rate deals end, the Bank of England has warned.
The news will reignite fears that the mortgage time bomb that exploded after Liz Truss’ mini-Budget and sent borrowing costs soaring has not died down.
The Office for National Statistics (ONS) estimates that households have accumulated between £143 billion and £338 billion in excess savings since the start of the pandemic.
Hunker down: Interest rates will stay high for longer after chancellor Rachel Reeves’ tax and spend budget
It comes as interest rates are set to stay high for longer after Chancellor Rachel Reeves’ Tax and Spend Budget last month rattled financial markets.
In a sobering assessment, the Bank estimates that 2.4 million homeowners paying less than 3 percent interest on their mortgages will face higher payments over the next three years as they lock in lower rates.
Most people who get a mortgage pay a fixed amount each month for several years, regardless of what happens to interest rates in the meantime.
About two-thirds of outstanding home loans have a fixed duration of five years, the Bank estimates, and many of them contracted before starting to raise rates from near zero in 2021 to combat runaway inflation.
It means homeowners with a £250,000 mortgage whose five-year fixed rate contract ends in 2026 will pay £3,000 a year more as their payments rise from £1,139 to £1,389 a month, according to the Moneyfacts website.
Interest rates peaked at 5.25 per cent and are now down to 4.75 per cent after the Bank’s latest cut last week. But experts warn that mortgage costs could continue to rise despite the Bank’s action.
This is because rates in the swaps market (which determine the wholesale price lenders pay for fixed-rate mortgages) have been rising since details of the Chancellor’s Budget began leaking in September, driving up borrowing costs. Government debt.
The Office of Budget Responsibility, which verifies Reeves’ plans, estimates that average mortgage rates will rise from 3.7 percent this year to 4.5 percent in 2027 and remain at that level through the end of the decade.
The Bank of England sounded the alarm in its latest monetary policy report, which said that “some mortgage holders have reduced their spending in anticipation of paying higher rates.” He cited a survey in which one in six households who saved the most over the past year said “future housing costs” were “a major factor” in their decision.
Households facing higher mortgage costs cut spending by about 30 percent of the expected increase in payments, the Bank added.
That figure rose to 60 percent among households already paying more on their mortgage.
Experts fear economic growth will slow if consumers continue to save more and spend less.
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