Living Cost Crisis Forces UK Households to Dip into Savings to Survive

The general picture for mortgage payers across the UK is becoming increasingly bleak. At no time since the historic recession of 2008 have more households struggled to keep up with their mortgage repayments? As the living cost crisis continues to escalate, things are only likely to worsen before showing any signs of improvement.

New figures from Octane Capital, a specialist property lending company, suggest that average monthly mortgage payments in relation to average salaries are breaking almost every record in the books. Taking the current average property price of £276,019 along with a 75% LTV mortgage on a 3-year fixed-rate deal, the average homebuyer is currently looking at a loan size of just over £207,000, assuming they pay a deposit of 25%.

Charged at an APR of 1.84% and taken out over 25 years, this all adds up to a standard monthly repayment of just under £860.

Across the UK, the average earner’s gross salary currently stands at £31,447, or £2,621 per month. This would therefore mean that a monthly mortgage payment of around £860 would immediately wipe out almost 33% of this average earner’s monthly income.

This is 3.1% higher than in 2011, 4.7% higher than in 2017, and a full 5% higher than at the beginning of 2020, just before the pandemic hit. In fact, the exact figure, 32.8% of the average earner’s salary going on mortgage repayments, was only higher during the 2008 recession, when it hit an unprecedented high of 34.3%.

Interest rate hikes hit households hard

The overwhelming majority of households across the UK have been hit hard by a string of recent interest rate hikes, compounded by record-high energy bills and unprecedented inflation.

“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,” said Octane Capital CEO Jonathan Samuels.

“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.”

Far from any real light at the end of the tunnel, most experts believe things are only set to worsen before there are any signs of improvement.

“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,” Mr Samuels warned.

“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.”

Mortgage payers are forced to dip into savings

During the pandemic, many households took the opportunity to amass considerable savings. Making the best of a bad situation, those who suddenly found themselves confined to their homes also found themselves with fewer ways to utilise their disposable income.

Unfortunately, this broad financial safety net is not going to help the approximate 17% of households across the UK that do not have any on-hand savings at all.

That is according to a report published this week by the Yorkshire Building Society, which also suggests that almost 40% of savers have been forced to dip into their savings to cope with the escalating cost-of-living crisis. Among them, 17% said that they had already spent at least £1,000 from their savings on everyday living costs.

Around 4,000 households were polled by YBS with questions on their saving and spending habits over the past couple of years. While many benefited from a long period of capped spending during the height of the COVID-19 crisis, the results of the poll suggest that a sizeable proportion of households are saving less than they were a year ago, or not saving anything at all.

Inadequate support for struggling households

As promised, Chancellor Rishi Sunak outlined the government’s relief package for struggling households on May 26. Mr Sunak confirmed that £15 billion had been set aside to help households cope with skyrocketing living costs and that the poorest citizens would receive the most support.

However, a £400 discount on energy bills for every household and a £650 one-off payment to the poorest eight million people were criticised by many as insufficient. With further energy price increases on the horizon, the vast majority of UK households are destined to find themselves further out of pocket as the year progresses.

Elsewhere, others have praised the government for at least taking some form of action, albeit at a relatively late stage in the game.

“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,” said Nitesh Patel, strategic economist at Yorkshire Building Society, in an interview with Mortgage Introducer.

“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.”

Further financial difficulties are expected

According to YBS, around 40% of UK households are expected to see their monthly outgoings increase by between £100 and £500 over the course of the next 12 months. Among those polled by YBS, 70% cited utility bills as their biggest cause for concern, followed by 60% who are already struggling with food and drink prices, and 58% worried about fuel prices.

While being interviewed by the mortgage introducer, Mr Patel was asked to share his thoughts on projected mortgage demand over the rest of the year. As mortgage rates increase and the living cost crisis worsens, prospective first-time buyers will be forced to reconsider whether they can realistically afford to own their own homes.

“The first thing to bear in mind is that many households that have managed to build up their savings are still in a fairly reasonable situation because the cost-of-living crisis has really only accelerated in the last three months, so they’re still okay at the moment, and there are obviously still some very good deals out there available for mortgages,” Patel said.

“In terms of mortgage demand, it is still very, very strong relative to supply. And that’s probably because mortgage rates are still very, very low.”

“We know that in the current environment, people who are economising are probably not going to spend money on areas that are not really essential, and that could have a similar effect on housing.”

Mr. Patel said that, in all likelihood, home purchase activity among first-time buyers will most likely decrease over the next six months. But as demand for affordable homes continues to outstrip supply by a significant margin, this is unlikely to have an adverse effect on sky-high property prices.

He also predicted a further spike in inflation beyond 10% by the beginning of next year, triggered by the upcoming energy price cap increase coming this October.

Millions of households are on the brink of economic disaster

With inflation already running at its highest level in almost three decades, more households than ever before are finding themselves on the brink of an outright economic disaster.

A recent study conducted by KIS Finance found that even before the most recent cost-of-living increases, a full 57% of UK households were already experiencing financial difficulties or expected to struggle financially in the near future.

Bank of England base rate increases have had a major impact on mortgage affordability, resulting in millions of mortgage payers struggling to make ends meet. While all this has been going on, Moneyfacts reports that around 520 mortgage products have been withdrawn from the market over the past month as banks become increasingly stringent with their lending criteria.

In total, KIS Finance reports that around 25% of adults across the UK are currently experiencing severe financial difficulties. Worse still, all indications point to further economic issues to come, as real wages are predicted to be lower by 2026 than they were in 2008.

The October energy price cap increase coupled with the elevated energy consumption during the winter months could add up to the perfect storm for households that are already struggling.

According to KIS Finance, younger households have been hit particularly hard by the living-cost crisis—around 35% within the 18–24 bracket say their current financial situation is anything but stable. In addition, 24% of people aged 18 to 34 are earning less now than they were at the beginning of the pandemic.

Given the extent of the crisis, the support package outlined by the Chancellor—a £400 discount on energy bills for every household and a £650 one-off payment to the poorest eight million people—is understandably being seen as a drop in the ocean for those worst affected.