Britain’s middle classes feel the effects of the cost of living crisis

As the term of their mortgage neared its end in September of last year, Iona and her husband began looking for a new deal.

The couple, both architects in their late 30s who asked to remain anonymous, saw their 1.6 percent rate jump to 4.7 percent on the best three-year fixed offer they could find, meaning they your payments will increase by £500 per month. at around £1,700.

“Everything we bring home from work goes towards the mortgage, childcare, shopping and bills – there’s nothing extra,” Iona explained, adding that one day last month she woke up to find that she only he had £3 in his checking account. .

In the year before Iona’s mortgage switch, record high levels of inflation prompted the Bank of England on an extensive tightening campaign, ending more than a decade of ultra-low borrowing costs. Fixed-rate mortgages, which reflect expectations for medium-term borrowing costs, followed suit.

Millions of middle-income households like Iona’s, whose earnings kept them relatively immune to last year’s cost-of-living crisis, could now see their income take a hit as old mortgage deals are withdrawn in 2023.

A report by Oxford Economics and financial services firm Hargreaves Lansdown found that while nearly 90 percent of the UK’s lowest-income families were poorly financially resilient when inflation hit record levels last year, many of middle-income people are now squeezed as higher mortgage costs bite.

The latest forecast from the National Institute for Economic and Social Research showed that real incomes for middle-income households will fall by around 6.2%, or £1,077 per year, in 2023-24.

In its Autumn Statement last year, the government announced additional cash payments totaling up to £900 for lower-income families, in 2023-24. According to NIESR, this will help offset some inflationary pressures, resulting in a 2.3 percent increase in net income for the poorest households.

But wealthier households receive less help to defray skyrocketing prices. “Of course [low-income families] they still face an incredibly difficult situation. Let’s not pretend that it is easy, but that the cash aid will make a difference for the poorest households. [. . .] while middle-income people don’t get the help but face all the costs,” said Adrian Pabst, NIESR economist.

In mid-October 2022, then-Foreign Minister Kwasi Kwarteng’s ill-fated “mini” budget pushed already rising mortgage rates past 6 percent.

With around 1.4 million UK homeowners set to pay off their fixed-rate mortgages this year, according to an analysis by the Institute for Fiscal Studies, many could see their monthly payments skyrocket.

the last official inflation figuresReleased on Wednesday, it showed UK inflation held unexpectedly high at 10.1 percent, beating economists’ predictions and making it more likely that the BoE will raise interest rates next month.

The average two-year fixed-rate mortgage deal at the start of 2021 was 2.57 percent, according to price comparison site Moneyfacts. Two years later, the rate for families for refinancing shot up to 5.32 percent.

a recent report by the BoE showed that housing costs will also rise for the 1.7 million homeowners with tracker mortgages, reflecting the bank’s sky-high reference rate.

“Add to this a cost of living crisis, high energy prices, coupled with inflation, home maintenance could now become unaffordable for many, leaving no choice but to sell and downsize,” said Iain Swatton. , Dashly’s director of mortgages. .

For Iona’s family, this means that most of the time they draw on savings to cover monthly expenses, echoing projections by the Office for Budgetary Responsibility that UK household saving rates will fall to near zero in 2023 and 2024.

“We are both handy spreadsheet people and have relatively good control of our finances and are also making a fair amount of money, and we are finding all of this messy and stressful,” Iona said.

The restriction means the number of mortgage holders at risk of default could rise by nearly 20 percent during 2023, covering an additional 425,000 homes, according to Oxford Economics and Hargreaves Lansdown.

Rising costs are likely to have a disproportionate impact on single and self-employed people, as well as younger generations. Despite representing only 46 percent of the market, the report shows that millennial and Gen Z mortgage holders will shoulder 61 percent of the increase in housing costs.

That being said, the latest data from the Financial Conduct Authority presented that in the last quarter of 2022, the proportion of mortgage holders in default was still close to its lowest level since the regulator began recording in 2007.

“The increase in bad debt is yet to come,” said Innes McFee, an economist at Oxford Economics. “It can tend to be quite a delayed process.”

The numbers going into default could get worse during the year, experts warn, after people gradually give up their existing agreements and try to adjust to the new level of payment.

Even with the challenges, “owning a home is still a great aspiration for most people,” said Ashley Osborne, CEO and co-founder of MyPropTech.

“That means that people are willing to make great sacrifices to get on the housing ladder and stay in it. Whether it’s forgoing vacations and going out, living in less than ideal circumstances.”

For Iona, this has meant switching to cheaper childcare, taking on more extra work and reviewing the family’s daily spending habits. “We are trying to be much smarter when it comes to ordering [groceries] online, and making sure we get all the lowest-cost weird vegetables I can find,” he said.

“It’s a bit funny, because you’re trying to mediate between small-scale savings on individual groceries and the huge ‘oh, it’s only going to be another £500 a month’, for reasons that seem very arbitrary,” he said. saying.

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