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It’s not just homeowners who’ll be affected by mortgage rate hikes

Written by Katie Rosseinsky

Chaos in the mortgage market isn’t just affecting homeowners – if you’re renting, it could well have a knock-on effect.

The UK mortgage market is experiencing major turmoil right now.

After Kwasi Kwarteng, the then-chancellor of the exchequer, unveiled his controversial mini-budget last month, the value of the pound fell to a record low against the dollar due to concerns over the impact that his plans would have on the UK’s finances.

Mortgage providers almost immediately started to pull their products from the market (as the sharp rise in gilt yields, aka the interest paid on government bonds, made it difficult to set fixed rates). Lenders have since returned with new, higher rates: the average interest rate on new five-year and two-year fixed-rate mortgages has since increased to an average of 6.47% and 6.29% respectively. These rates have now held steady for several days, which doesn’t sound like much, but it could herald a period of stability after weeks of flux.

The Bank of England is also due to meet next month and is expected to raise interest rates – following a hike in September from 1.75% to 2.25% – further squeezing homeowners on a variable rate or tracker mortgage.

New analysis from the Resolution Foundation thinktank now suggests that more than 5 million households could see their annual mortgage payments shoot up by an average of £5,100 between now and the end of 2024, at a time when so many are already struggling with skyrocketing energy bills and the soaring cost of essentials.

Their research also shows that almost one-fifth of British households will have to spend more on housing by the end of 2024, with the increase adding up to £26 billion.

“Between now and the next election, Britain is on track for a £26 billion mortgage hike,” Lindsay Judge, the Resolution Foundation’s research director, told the Guardian

“Households across Britain are currently living through an inflation-driven cost of living crisis as pay packets shrink and energy bills rise,” she said. “The government has responded with policies such as the welcome energy price guarantee. But the Bank of England is responding too by raising interest rates, which will benefit savers but cause a fresh living standards crunch for mortgaged households.”

But how does this impact those of us who are yet to get on the property ladder and for whom home ownership is a long way off?

Rental growth, explains Zoopla’s consumer expert Daniel Copley, has accelerated over the last 12 months, from less than 2% in July 2021 to 11.9% in August 2022. “Since last year, we have seen the average rent increase by £115 per month to £1,051 with renters now spending on average over a third (34.4%) of their income as a single earner.”

Though this rise, he says, “isn’t entirely attributable to landlords increasing rents as their own mortgage costs rise, this will play an increasing factor as we go into 2023 and landlords re-mortgage with rates near 6%”. 

If mortgage increases are passed on to tenants, already pressurised household budgets will be stretched even further, says Dr Alison Briggs, research associate in human geography at the University of Manchester’s School of Education, Environment and Development. “The medium to long-term picture looks very bleak, with potential for greater numbers of tenants being unable to pay their rent.”

Another potential consequence is landlords choosing to sell up in the face of mortgage hikes. There is currently “a chronic shortage of rental supply, particularly in London”, says Copley, as people stay put to avoid rent hikes, and a landlord exodus could end up “possibly adding to the supply issue” for renters, though it’s by no means a simple issue: it’s worth noting that if more housing stock is freed up, this could help assuage the supply and demand problem for would-be buyers currently stuck in the rental market.

Still, this would take a while, and in the short term, for renters looking to buy, the net costs of acquiring a property are going up significantly and more resources are being consumed by paying increased rents, Briggs says, which inevitably “limits renters’ capacity to enter the property market” (and if they remain as renters, they are adding to that supply and demand problem). 

Demand for renting in London is especially high

Either way, it’s certainly a stressful time to be a tenant, so it’s more important than ever to be aware of your rights as a renter. Copley recommends using “recognised bodies like the National Landlords Association or Association of Residential Letting Agents to ensure you’re renting from a legitimate landlord” and to “help ensure your deposit and rights are protected”. 

During the fixed term of your tenancy agreement, your landlord can’t increase your rent unless there is a rent review clause allowing for this. This clause will lay out when and how the increase will be made, so check through your contract carefully, and if you have any concerns, you can contact Citizens Advice or Shelter for free and impartial advice. 

Images: Getty

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