Borrowing predicted to grow to 5% of household income by year end

New research by Oxford Economics has forecasted that interest payments on mortgages, credit cards, car loans and other borrowing will grow to 5% of household income by the end of this year.

The increase is up from 1.5% at the end of 2021, and the highest proportion since the end of 2008. The rise is mostly due to the rapid increase in mortgage rates, which the consultancy expects will rise to 5.4% for a two-year fixed across the second half of this year, up from 1.4% in the second half of 2021.

According to UK Finance, mortgage repayments as a percentage of income have already risen to 21% on average in the first three months of this year, the highest level since the final three months of 2008.

Andrew Goodwin, Chief UK economist at Oxford Economics, said he had previously expected the Bank to start cutting rates from May next year, but now believed this would be delayed until the following year. 

“The Monetary Policy Committee (MPC) has a relatively pessimistic view of potential supply and is particularly wary of the inflationary implications of a tight labour market.Whilst Oxford Economics is forecasting a modest rise in unemployment over the next year, the group said it was “unlikely that we will see much spare capacity emerge”. 

“The stickiness of core pressures means we see headline inflation remaining above the 2pc target until early-2025. And the persistent inflation overshoots of the past couple of years will still be fresh in the memory, not only for policymakers but also financial markets. 

“Against this backdrop, we think the MPC will err on the side of caution, waiting until it has strong evidence that price pressures are back under control before it considers loosening policy.”