Increased Mortgage Interest Rates Combined with the Cost of Living Crisis Forces Buyers and Homeowners to Dip into Savings

It’s no secret that times are hard for millions of UK residents. With the cost of living escalating at a speed not seen since the big recession back in 2008 and the cost of mortgages constantly on the rise, affordability for new buyers is becoming increasingly out of reach, with many not having enough savings for a deposit and others struggling to meet their current monthly mortgage obligations.

Cost of living crisis

Adding to the misery is the fact that inflation rates are at the highest seen for thirty years, pushing monthly outgoings through the roof for the vast majority of the population. Wages are certainly not keeping up with the rapid price increases, resulting in many accessing savings just to meet their monthly commitments. With inflation at a thirty-year high of 9% and expected to reach 10% by next year, households will need to tighten their belts even further.

And it’s not just inflation that is causing chaos for many; the enormous gas and electricity price hike is a worry for almost every household in the country. This is due to the impending increase in the energy price cap coming in October and the embargo on oil and gas from Russia. Diesel and petrol prices are at the highest ever seen, which is having a detrimental effect on drivers and, in turn, causing further increases in prices due to the added costs of manufacturing and logistics.

The Bank of England increased the base rate for the fourth time in a row

Despite increased mortgage interest rates, the property market remains surprisingly buoyant, but experts are predicting a marked slowdown over the next year, when house prices are expected to stabilise and, with any luck, the economy will start to recover, although there is still a lot of uncertainty surrounding this expectation as inflation continues on an upward trajectory.

The main reason for the interest rate hike is that the Bank of England has raised the base rate four consecutive times since December 2021, increasing base rates from 0.1% to 1%. Their reasoning for doing this is to try to tackle the huge increase in inflation. The concept behind this is to discourage people from spending and encourage saving instead.

A third of the income needed for mortgage repayments

Average monthly mortgage repayments are now approximately a third of monthly income. Annual income, on average, in the UK is currently £31,447. So for example, a home bought for the average price of £276,019 on a 25-year loan period with a 75% LTV (£69,000 deposit) and a fixed rate at the current average mortgage rate of 1.84% will equate to monthly repayments of £859.41.

Current figures show homeowners using 32.8% of their monthly wage to meet their repayment obligation, which is up 5% since before the COVID-19 pandemic and close to levels seen during the credit crunch of 2008 when the UK was plunged into a crippling recession.

CEO of Octane Capital, Jonathan Samuels, commented: “The cost of living crisis is a current cause of great concern, and many homeowners are not only combating the inflated cost of day-to-day living but also the monthly cost of their mortgage following a string of interest rate increases.

“At the same time, wage growth has simply failed to keep pace with these rising costs, and so the proportion of our income required to cover our monthly mortgage commitments is now substantially higher than it has been for many years.

“Unfortunately, this cost only looks set to increase, as we expect to see interest rates increase further throughout the year. The best advice for those currently struggling is to consult a mortgage professional and see if they can swap to a product offering a better rate. For those currently looking to buy, it’s vital to factor in any potential increase and not borrow beyond your means based on current rates.

“While the current cost of borrowing may still remain fairly favourable, it’s vital you consider what any further increases may mean for your financial stability, as those borrowing right up to their limits initially are sure to struggle further down the line.”

Savers are forced to access funds to survive

It’s not surprising that a huge number of UK residents have been forced to use savings to get through the month, particularly in the last year. That is true for those lucky enough to have savings to fall back on, but the financial strain on those who have little to no savings is on the rise, with many getting deeper into debt, and the forecast for the next twelve months does not look bright.

According to a report from the Yorkshire Building Society, aptly named “Inflation Nation”, 17% of UK households had no savings at all. The report, which surveyed 4000 households, revealed that 39% had withdrawn funds from their savings account, with a further 17% taking out over £1,000 to meet their financial obligations.

The report went on to reveal that the vast majority of people were either unable to save anything at all or were saving significantly less than they would typically be able to save.

The report went on to show that, of those surveyed, around 40% predicted increases of between £100 and £500 in monthly bills over the next year, making it even harder, if not totally impossible, to increase savings.

Government help for millions

On May 26, Rishi Sunak announced a £15 billion package to help UK households with escalating energy prices. Poorer households will be eligible for a one-off £650 payment to help with gas and electricity bills, with the rest of UK households receiving a £400 discount.

He stated, “We know that other countries in Europe have taken measures to help households with their energy bills, so this is obviously very helpful from an economic perspective, unlike the previous plan that was made available in March.”

“The government’s measures are really quite important because we know that there are a lot of people in this country who don’t have any form of savings.

“If a large proportion of the population starts to reduce their expenditure in other parts of the economy, then I think we could be in a very, very difficult economic situation.”

Although this help is welcome, for many households, it will not be nearly enough to keep them out of an impending financial hole over the next twelve months, with the cost of living crisis not expected to end any time soon.