More than 300,000 homeowners have been pushed into poverty as a result of high mortgage repayments.
Thousands of households remortgaging or taking out new mortgage deals since 2022 have experienced sharp falls in their disposable incomes as higher interest rates have pushed up housing costs.
An estimated 320,000 such people were plunged into poverty by December 2023 as a result, according to the Institute for Fiscal Studies (IFS) and the Joseph Rowntree Foundation (JRF).
Official statistics do not usually measure households’ mortgage interest payments directly, instead modelling them based on average interest rates, meaning there are more people pushed into financial hardship than previously reported, it said.
This matters when there is a growing spread of interest rates as some households come off their fixed rate. For example, in 2022–23, mismeasurement of mortgage interest payments resulted in the number of those in poverty being understated by 70,000.
As more fixed-term mortgages end, that number is set to rise to 150,000, based on December 2023 interest rates.
The IFS added rising mortgage rates “have played and are likely to continue to play an important role in many households’ living standards”.
Many households saw a jump to their mortgage rates in 2022 and early 2023 following Liz Truss’s mini-Budget in September 2022.
Rates soared in the days, weeks and months after as lenders feared the Bank of England would make borrowing more expensive through higher interest rates. Uncertainty meant banks and building societies pulled their best buys.
Although they have since eased, interest rates were held at their 16-year high of 5.25 per cent in June. This is despite the fact that inflation had fallen to its 2 per cent target.
Some economists had expected rates to fall in August, but the latest inflation figures suggest the Bank may not cut until the autumn.
An eagerly awaited interest rates cut would unlock the stagnant housing market as buyers wait for better deals. It would also help the new Labour Government’s plan to “grow the economy” as it would improve spending power, as well as reduce the amount the government pays on its debt repayments.
But for those locked into new mortgage deals of two or five-year terms it would be of little help.
Speaking to i, Aaron Strutt, of brokers Trinity Financial, said: “Many mortgage borrowers would love the Bank’s Monetary Policy Committee (MPC) to reduce the base rate next week, but it probably will not happen.”
The Bank rate influences what other banks charge their customers for loans such as mortgages, and the interest they pay on savings.
But official statistics do not usually measure households’ mortgage interest payments directly. Instead, they model them based on average interest rates, meaning there are more people pushed into financial hardship than previously reported.
Sam Ray-Chaudhuri, a research economist at IFS and an author of the report, said: “Perhaps surprisingly, they [rising mortgage rates] are not measured properly in the official income data. This has led to the headline statistics understating the number of people in poverty, something set to get worse in next year’s data.”
According to the IFS and JRF joint report, there is evidence that mortgage rate rises are causing more adults to be behind on bills.
Those remortgaging in 2022 were two percentage points more likely to fall into arrears on bills than those with mortgages who had not remortgaged, suggesting that once all households have remortgaged, the number of adults missing bill payments could rise by 370,000.
More broadly, the report found that despite the pandemic and the cost of living crisis, the overall rate of absolute poverty was the same in 2022-23 as in 2019-20 at 12 million people, although it did rise slightly by 520,000 people between 2021-22 and 2022-23.
However, there was a significant increase in more direct measures of hardship. For example, the proportion of working-age adults who reported being unable to keep their home warm enough rose from 1.8 million to 4.6 million between 2019-20 and 2022-23.
Part of the difference is likely to relate to how the official statistics measure incomes and hence poverty. Higher energy and food prices mean that lower-income households and pensioners faced a higher inflation rate than average – but this is not captured by the official poverty statistics.
Taking account of higher inflation for these households implies poverty rose by 210,000 more people than implied by official statistics for 2021-22 and 2022-23 (730,000 people rather than 520,000), including 80,000 pensioners.
Commenting on the report, Peter Matejic, JRF chief analyst, said: “This research shows the cost of living crisis wasn’t felt equally by everyone. Compared with before the pandemic, many more people, especially those on a lower income, struggled to heat their homes or keep up with their bills.
“One reason lower-income households went without essentials is because they faced a rate of inflation even higher than the headline numbers. High interest rates also saw many households forced into financial hardship after they remortgaged.
“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.”