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British homeowners are paying an average of £840 a year more when they refinance their mortgages, as the rising borrowing costs triggered by the Iran war start to impact consumers’ spending power.
About 1mn households have rolled off fixed-rate mortgage deals since February, according to Bank of England data.
On average they are paying between £50 and £70 a month more than the rates that prevailed on the eve of the US-Israeli attacks on the Islamic republic, the BoE’s figures show.
Those with larger loans face a substantially greater hit. A homeowner looking to refinance a £500,000 mortgage with a representative two-year fix could expect to see their interest payments increase by more than £250 per month, assuming a 20-year mortgage term.
Over the first two years, this would result in them paying an extra £6,144 in interest, owing in part to the fallout from the Iran war.
“This adds to the already very large increase [in payments] they were going to face,” said Andrew Goodwin, UK economist at Oxford Economics, referring to the higher interest rates that borrowers have had to absorb since Liz Truss’s “mini” Budget in September 2022.
“You worry for some borrowers: it will be very punitive and could be the factor that tips them into arrears and forces them to sell,” he added.
Prime Minister Andy Burnham has made helping the public with the cost of living a crucial part of his pitch to voters since taking power in July, with measures including temporary VAT cuts for pubs.
The rise in mortgage rates threatens to outweigh his efforts and damp consumers’ spending, which has remained robust in the first months of the war.
The quoted two-year fixed mortgage rate, with a loan-to-value ratio of 75 per cent, increased nearly a full percentage point between February and August, from 3.97 per cent to 4.92 per cent, according to the BoE figures.
James Tatch, head of analytics at UK Finance, a trade body, estimated 700,000 homeowners will be coming off fixed-term deals between July and December this year, with an average outstanding balance of £164,000.
Recent volatility in the swaps market — which lenders use to price their fixed-term loans — has caused some, such as Nationwide, to withdraw and reprice their mortgage products twice in the past two weeks.
For those whose five-year fixes are due to expire in the coming months, the impact on affordability may at least be mitigated by the capital repayments they have made over the period and their wage growth, Tatch said.
Andrew Montlake, managing director of mortgage broker Coreco, said: “People need to realise that mortgages are on the front line when it comes to global economic moves.”
Mortgage payments for first-time buyers rose to 32.6 per cent of take-home pay in the second quarter, up from 31.7 per cent in the first, according to Nationwide.
For about one-third of adults paying mortgage or rent, it is very or somewhat difficult to afford these payments, according to an ONS survey run in the second half of August.