Cost-of-living to impact more than one million people set to remortgage in 2022
Up to 1.3 million customers about to reach the end of their fixed rate mortgage deals this year could see disposable income shrink by 7%, according to a recent report by UK Finance.
The ‘Trends in the Economy and Lending’ (TEAL) report said that unless homeowners remortgaged, they would automatically move on to their lender’s Standard Variable Rate (SVR) which, combined with the cost-of-living impact and the costs of having to remortgage a new deal, would result in roughly a 7% decrease in their free disposable income.
The report noted that the cost-of-living increases had been due to “inflationary headwinds” after CPI inflation hit 9.1% in May, driven by “persistent supply chain issues” that began with the COVID pandemic, as well as the global economic fallout of the ongoing war in Ukraine, which began on February 24.
But households will feel the pinch even further in the coming months as inflation is expected to reach 11% later this year and energy bills are likely to rise by around £800 in October.
Read more: Fixed rates increasing at record pace
And in contrast to previous inflationary periods in history, a key difference is that wage increases will most likely not keep up with price growth.
Consequently, although a wage-price spiral might be avoided, households “are set to see a significant contraction in real incomes”, the report pointed out.
On average, the combined impact of inflation, income and tax changes would knock around 3% off the “wiggle room” borrowers had.
The report highlighted originations from 2017 and 2020, as they corresponded to five- and two-year fixed rate deals, which also account for about two-thirds of the deals that are maturing this year.
However, UK Finance stressed that three quarters of mortgage customers were on fixed rates and would therefore see no payment increases for the rest of the year following bank rate increases.
Ahead of the report’s release earlier this month, the Office for National Statistics (ONS) revealed that real household disposable income dropped by 0.2% between January and March due to household inflation (1.7%) outstripping income growth (1.5%).
And in a separate report released this week by financial product data provider Moneyfacts, average two- and five-year rates rose sharply this month, representing the largest month-on-month increases since the company began keeping records in 2007.
Data also showed that the average Standard Variable Rate (SVR) edged past the 5% mark for the first time in more than 13 years, and now stood at 5.06% - the highest recorded by Moneyfacts since January 2009, when it reached 5.14%.
This followed five consecutive base rate increases by the Bank of England since December, from an all-time low of 0.1% to the current 1.25%.
Each 0.25 percentage-point increase in rates is reportedly expected to add around £16 a month to their repayments, although not all lenders have passed these increases on to their customers.
Eleanor Williams, mortgage expert at Moneyfacts, said that for eligible borrowers coming to the end of a deal “the incentive to lock into a new fixed deal is still clear”.
Read more: Brits feel the crunch
Williams pointed out that a borrower switching from the average SVR to the current average two-year fixed rate could achieve a monthly saving of just under £150, based on a mortgage balance of £200,000 over 25 years and comparing potential monthly repayments at a rate of 5.06%.
She added: “While we remain in a cost-of-living crisis, with pressure on many household budgets, it’s vital that prospective borrowers explore their options and are not disheartened by recent rate rises.”