Soaring mortgage rates will cost 1.4m a fifth of disposable income

26th June 2023

Higher mortgage costs will mean almost 1.4 million households will need to spend at least 20% of their disposable incomes on repayments.

According to the Institute for Fiscal Studies, in March 2022, households with a mortgage were spending an average of £670 per month on payments, £230 of which was interest. Now, mortgage-holding households face paying an average of nearly £280 more each month, with 30 to 39-year-olds paying nearly £360 more. This comes as the average mortgage rate for a two-year fixed deal rises to above 6% and the average five-year fixed rate deal has increased to 5.67% – up from 5.62% on Friday.

In March 2022, households with a mortgage were spending an average of £670 per month on mortgage payments, £230 of which was on interest payments. Figure 1 shows how those figures will change if mortgage interest rates remain at their current level, relative to a situation where the March 2022 interest rates persisted. On average those in mortgage-holding households will pay almost £280 more each month, with 30-39-year olds paying almost £360 more. This will be a significant hit to mortgagors’ disposable incomes (i.e. incomes after mortgage payments) at a time that families are already under strain – on average disposable incomes will fall by 8.3%, with those aged 30-39 again seeing the biggest hit (almost 11%). For some the rise will be substantially larger: almost 1.4 million – 690,000 of whom are under 40 – will see their disposable incomes fall by over 20%.

The upshot of this is that more households will be spending high proportions of their incomes on mortgage costs.

Overall, 60% of those with a mortgage (8.5 million; 19% of adults) are set to spend more than a fifth of their incomes on mortgage payments. This is a substantial increase. In March 2022, only 36% of mortgagors were in this position (5.1 million; 12% of adults). It also higher than in 2007-08, before mortgage rates started to fall rapidly following the Great Recession. Back then, just over half of mortgage holders were spending more than a fifth of their income on mortgage payments.