A new UK Finance report has highlighted that many households are facing substantial financial stress due to their fixed-rate mortgage deals ending this year. Officials said that soaring inflation and interest rate increases could see many homes experiencing a significant drop in disposable income levels.
The trade association said households coming off fixed-rate deals and moving onto new deals could see their disposable income levels shrink by 7% on average. UK Finance officials also noted that this would likely lead to increased mortgage arrears, especially among households with lower incomes.
According to the data, 1.3 million mortgage customers will see their fixed-rate deals end this year. Once these expire, they will be moved onto their lender’s standard variable rate mortgage unless they take steps to re-mortgage. Around two-thirds of the fixed-rate mortgages that will end this year are for two or five years.
Bracing for increased inflation and higher interest rates
The Bank of England’s base rate has been raised several times over the past six months, and while each increase has been for 25 basis points so far, there are suggestions that the August one could be 50 basis points.
This means households have to brace themselves for not only higher interest rates in the months to come but also for continued inflation increases. The Bank of England expects inflation to hit double figures over the coming months, piling pressure on those who will find themselves losing the financial security of their fixed-rate mortgages.
UK Finance said in its report that those looking to re-mortgage might be able to find competitive deals with their existing lenders. In a statement, the company wrote: “Although these borrowers’ re-mortgaging options on the open market may be more limited, the widespread availability of internal product transfer deals means almost all will be able to access a new mortgage deal at competitive rates.”
It was further estimated that around 9% of households on fixed rates that expire this year would be left with 10% or less of their income as disposable income once they move to another deal. Another 20% will face less pressure, with 10-20% of their income left as disposable income.
Many mortgage borrowers have no experience with inflation worries
According to officials from UK Finance, many people who now have mortgages are not old enough to have experienced inflationary pressures and concerns in the UK. The company’s report stated: “Two generations of current mortgage customers were not yet born at the time and have had no experience of a UK in which inflation was a cause for widespread national or personal concern.”